Credit crunch?

The U.S. equity markets have been hard on the nerves for the past several weeks. I received an email today asking me if I am so smart, how come I did not sell at the top of the market a few weeks back? And why are energy companies underperforming the markets if there is an energy crisis looming? Good question… if you admire unreasonable expectations.

The credit crisis has very, very, very little to do with the looming energy crisis. It has some impact – all else being equal if the economy does not grow, demand for fuels will not grow, taking pressure off oil prices. All things are not equal. Besides demand, we have this pesky problem with supply. At any time in the past 50 years could you have imagined that oil prices would be as high as $71.48 (that was the front month contract as I write this) going into an economic slow down? In the last recession prices fell below $20. Why is the price closer to $100 than $20? Let’s look at some data (please don’t let your eyes glaze over):

Commercial inventories of U.S. crude oil have declined about 4.8% in the last 5 weeks to 335,228,000 barrels of oil. (http://tonto.eia.doe.gov/dnav/pet/hist/wcestus1w.htm)
Now you may think that that is a lot of oil. So let me put this in perspective: In the week of August 20, 1982 the U.S. commercial inventories of crude oil stood at 361,185,000 barrels of oil. We had more oil in inventory in the period shortly after our last oil crisis than we do today, 25 years later to the week. Do you know how much oil the U.S. consumes per day in 2007? About 20,500,000 barrels per day - that means we have 16.35 days of supply (not including the Strategic Petroleum Reserve). We import 60% of that oil. In 1982 the U.S. consumed approximately 15,800,000 barrels per day and imported approximately 25% of that. Houston, we have a problem…

OPEC just told us that they plan on producing over 250,000 bpd per day LESS in 2008 than in 2007 (and they produced less in 2007, than they projected in 2006), while non-OPEC production will, by all accounts, decline in 2008 from 2007.

The oil producing countries are not only producing less, they are consuming more, and will have less and less and less oil available to importing countries, the largest of which is the U.S.

The credit crisis has created some great bargains within the energy complex. I have laid out the case for much higher oil prices. The average multiple in the group is substantially lower than the market’s average. We are one headline, one hurricane, one terrorist attack, one pipeline shutdown, one import crisis, etc… from MUCH higher oil prices. In that environment, would you rather own U.S. dollars (treasuries, C.D.’s.etc…) or energy (equity or commodity)?

It is true that Natural Gas (“NG”) is dragging down the energy indexes, but I would not count on that for too much longer. In my next blog I will cover NG, where the future, as far as North America is concerned, is at least as dire as that for oil.

If you try to time this you run the risk of being shaken out at precisely the wrong time. The markets do not operate at our convenience. If you think the credit crunch came unexpectedly, wait till you see the energy crunch. The credit crunch was just a warm up.

Yours for a better world,

Mentatt (at) yahoo.com