Thursday, November 29, 2007

Dead Money

The price action in crude today left much to be desired. In the span of just over 2 months crude hit the ejection button, catapulting from $70 to just over $99 intraday as measured by front month WTI. Since then, it appears crude hasn’t even reached for the parachute’s rip-cord yet. Even with the Canadian pipeline explosions, which drove crude prices up over $4 at one point during the day, oil could not muster a decent closing gain, closing at $91. That ain’t a good sign.

As I always say, markets zig and markets zag, they don’t zig and zig. That last rally is now in the midst of a correction of its own making, necessitated by the viciousness of its ascent, and it is unlikely that it is done, especially with the ForEx markets unwinding the Long Euro/Short Dollar trade. I hate the Dollar versus commodities, but I have no illusions about the Euro, which will have commodity inflation problems of its own.

This could mean a correction for Gold, too.

The longer-term story for higher oil prices is very much intact, but you can be shaken out of the best opportunities if you harbor unreasonable expectations – like expecting rallies to go on forever without interruption.

The trade now might be away from the commodity and back to the equities. Unfortunately, you might have to endure some pain before the pleasure.

On the other hand, this might be a short, and delayed, “shoulder period” price slide. After all, we are going into the teeth of the Northern Hemispheres winter, and China’s import appetite seems to be back with a vengeance, after a respite in September and October. That, and the fact that inventories continue to fall precisely when they should be rising – it is not cold enough for fuel oil and it is not the summer driving season – might make this correction somewhat short lived – though it could still be painful.

Have I run out of “on the other hands” yet? That’s the problem with trading for a living. You need those extra other hands to keep all those balls in the air.

Mentatt (at) yahoo (dot) com

Wednesday, November 28, 2007

An Apocalypse NOT!

I get a decent amount of email from the “doom and gloom” folks asking me when I think the “collapse” takes place. Collapse? What collapse?

The decline in oil availability will be a slow, grinding process (in my opinion) that will not fit nicely in a 2 hour movie, 3 minute pop hit, or 15 second political sound bite mindset. I hope I can disabuse the doomers that visit here that they need some kind of bomb shelter. Although I fully appreciate your point of view, my commentary is directed toward how one might direct the investments that they have worked so hard for. I sincerely believe that the U.S. oil supply situation will have profound effects on our financial and real estate markets and currency over the next 5 years, but I do not think this will happen on a Tuesday afternoon. Nor do I believe that we will descend into anarchy. Are not resource wars (starting with Iraq), and the prospect of hyperinflation, and stagnant or declining GDP enough? Well, at least I hope they are.

My issue is this: Why should you work so hard only to pour your investment dollars into a leaking bucket? You would have been better off spending those shekels on vacations, expensive wine, and song. (Actually, that sort of appeals to me.) Some might find that pecuniary, but those that do probably did not spend a career doggedly pursuing some level of financial independence. Actually, I am quite sure that on some level the tied dye set is HOPING for a collapse. Teach those yuppie pricks a lesson.

I know that a lot of the peak oil blogsphere is filled with disaster scenarios, but I sincerely doubt this is the most likely outcome. That argument that we will experience immanent agricultural disaster due to declining energy inputs is just not that likely. The markets are efficient enough to redistribute those inputs away from Suzie-Cuzie’s trip to the mall and into the farmer’s tank and fertilizer bin. Yes, food is going to get much more expensive, and yes, this will fall disproportionately on the poor. But the aggregate AMOUNT of food available to Americans is not the problem, but rather how to pay for assistance to the poor.

This is not to say that our agricultural exports won’t decline and harm others. I sadly think that is a rather likely outcome. Those of you that have been following my blog know that I have great concerns in this area. Wheat and corn production will become an increasingly expensive proposition, and that will negatively affect aggregate crop production, just look at wheat inventories, and in turn available exports and domestic meat production, but the lesson of history is that people will be “incentivized” to produce some of their own food. As an avid gardener, I can tell you that a simple kitchen garden can overwhelm your ability to consume all that is produced at harvest time, the surplus of which can certainly be preserved. It will not be necessary to produce ALL of our own food (at least not for 20 or 30 years, all bets are off at that point in the oil production curve) just enough to bring the marginal scarcity food cost down to an affordable level.

I get email from one dour fellow who tells me that we have lost all of the knowledge to do this. What knowledge, gardening? Get a grip, and join my garden club. You would be impressed with what these folks know.

As my friend FireAngel from likes to point out, if India can feed over 1 billion people with less arable land and far less fossil fuel imports, North America certainly can feed its population.

There is also some slack for the economy in the wasteful way in which we use oil. FireAngel recently pointed out that driving around in circles does not increase GDP.

If it were going to be Armageddon, what would be the point of investing? Better to blow it all on a trip around the world.

No, the Apocalypse won’t be arriving anytime soon, but a paradigm shift is, in my opinion, underway as I write this. In this paradigm shift, there will be winners and there will be losers. Not much different than our current reality. It is the INSISTING that things be a certain way that will get you into trouble. Flexibility and adaptability will go a long way in the environment I foresee.

No, it won’t be business as usual. We are likely to be a whole lot less mobile, live in smaller homes, and consume less frilly BS. We won’t be commuting as far, be more involved in our communities and our children’s lives, and we even might all have a new hobby – gardening. But I ask you: Is that really Armageddon?

Yours for a better world,

Mentatt (at) yahoo (d0t) com
What goes up must come down meets what goes in must come out.

Any farm boy knows that whatever hay they fork into the front of the horse stall they will have to shovel out the back and wheel it over to the manure pile. Same thing with fossil-fuels. Whatever we burn comes out the tail pipe/smokestack. Elementary, my dear Watson.

The U.S. reported a decline in greenhouse gas emissions, the first decline since 2001, when the U.S. was last in recession. This was on the news wires today:

“U.S. emissions of greenhouse gases fell 1.5 percent in 2006, the first annual reduction since 2001.

Total emissions fell to 7.1 billion metric tons, according to the report today from the Energy Information Administration, the statistical arm of the U.S. Energy Department. The year-to- year drop in gases blamed for global warming is the third since 1990.

The decline was largely the result of cuts in carbon dioxide output, which fell 111 million metric tons below 2005 levels. Favorable weather conditions, higher energy prices and increased use of natural gas for power generation lowered carbon pollution, according to the report.” Bloomberg News November 28, 2007

Trust you me, if we emitted less it is because we CONSUMED less, and we consumed less because that WAS ALL WE HAD TO CONSUME. We consumed all that was available. (If some moron comes on T.V. and says: “Good news! The U.S. is lowering its carbon footprint!” You will know you are in the presence of an imbecile, although I am sure some miscreant will try and run this past the folks on the couch.)

Anybody care to take the other side of a wager? I will bet greenhouse gas emissions will be lower in 2007 than in 2006 irrespective of weather conditions this winter.

You can’t emit what you don’t burn.

Yours in a lower carbon foot print (HA!),

Mentatt (at) yahoo (d0t) com
It is the denial of our energy situation that assures the certainty of the outcome.

For years now, the American people have been misled by the collective denial, and outright lies, of our political and media establishment.

“The Hydrogen Economy”, “Electric Cars”, and “Clean, Environmentally Friendly Ethanol” each controlled the headlines for about 2 years each since 2001. Today, ethanol made the front page of The Wall Street Journal as the evidence overwhelms the folks in charge of the propaganda for denial that this bio-fuel is not so environmentally friendly and provides little more energy to the end user than was consumed during its production. What’s next, solar powered bicycles?

I was actually fairly impressed with the WSJ for having the temerity to make this a front page article. When the idea of the “Hydrogen Economy” fizzled, the mainstream media did not report on its demise, leaving the great unwashed to assume that “they” were still working diligently on our George Jetson future. I think that perhaps, this time, the WSJ recognizes that further (complete) denial is not in their best interest, any more than putting their fingers in the proverbial dyke. Witness, in the span of 2 weeks, “Peak Oil” and “Ethanol Craze Cools as Doubts Multiply” make the front page headline. Amazing. Perhaps a little late, yet still amazing. When was the last time you heard a politician admit they were wrong?

The jaw boning in the financial media remains deafening, despite the WSJ’s newfound affection for the facts. Two days ago, the financial media was abuzz with reports that OPEC was going to increase their output of crude oil to bring down the price of oil and thus save the world economy from recession. This morning, OPEC is scrambling to get to the microphones to reign in any unrealistic expectations.

“Crude oil was little changed in New York as OPEC ministers said the group is doing all it can to control prices, countering reports of a plan to raise output.

The Organization of Petroleum Exporting Countries currently has no plan to raise oil output when it meets next week in Abu Dhabi because the market is well supplied, Qatar's oil minister said today. Libya's top oil official said the group is unable to increase production any further.” Bloomberg News, November 26, 2007

Folks, none of the available data supports any suggestion of a rapid increase of oil supplies from the exporting countries. Actually, all of the available data suggests that their exports are heading into inexorable decline. Pay no attention to the man behind the curtain! The Wizard of Oz can no more “stand in front of an oil well with a check book”, or an army, and demand that that well produce more.

Oil is slowing the world economy, not the other way around.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, November 27, 2007

The U.S. equity market found and Oil seems to have lost their respective “footing” in today’s trading. Seems oil traders are beginning to believe news reports of declining oil/gasoline demand due to higher prices. Thank goodness you have me, assisted by my trusty calculator, to cut through the propaganda. And speaking of propaganda, this was on Bloomberg News today:

“U.S. motorists cut back on gasoline purchases during last week's Thanksgiving holiday as prices stayed above $3 a gallon, a report from MasterCard Inc. showed.

Consumers purchased an average 9.32 million barrels of gasoline a day in the week ended Nov. 23, down 1.7 percent from the same week last year, MasterCard, the second-biggest credit- card company, said in its weekly SpendingPulse report. It was the fifth consecutive week that demand at the pump dropped compared with a year earlier.” Bloomberg News, November 26, 2007

Now that’s really interesting because according to EIA data:

(you can read the table yourself here:

Wholesale prices for RBOB Gasoline finished the week ended 11/16/07 at $239.150, and;

Wholesale prices for RBOB Gasoline finished the week ended 11/17/06 at $156.036

A price increase of 53.26% yielded a demand decline of 1.7%? Or did a SUPPLY decline of 1.7% require a 53.26% increase in price in order to bring supply and demand into equilibrium?

And that begs another question: Did the price increase really bring supply/demand equilibrium, or was the rise in prices cushioned by drawing down inventories?

Hmmm… The plot thickens… So let’s go to the video tape! (or to the EIA data base, as it were)

RBOB Gasoline inventories as reported by the EIA, week ended 11/17/06: 42,747,000 barrels

RBOB Gasoline inventories for week ended 11/16/07: 40,446,000

The plot gets thicker… let’s have a look at finished gasoline products (not just RBOB)

EIA total gasoline inventory week ended 11/17/06: 110,431,000
EIA total gasoline inventory week ended 11/16/07 104,516,000

The plot is as thick as frozen molasses at this point. Let me sum up the disparate data:

1. Wholesale gasoline prices increased 53.26% year over year
2. “Demand” fell 1.7%, according to Bloomberg
3. Inventories declined 5.35%
4. Retail gasoline prices increased 38% (per Bloomberg)

Forget for a moment the different percentage increase in price for retail and wholesale, as these are different markets. Let us just use the 38% increase in retail prices. Now perhaps you think that crude or other finished products increased by the amount gasoline inventories declined (plus the 1.7% decrease in “demand”). Nope. Crude oil inventories for the same week over week period were down approximately 8%, distillates were down 3%.

Inventories went down in all categories, gasoline consumption for the entire year is down, as is the week over week 11/17/06 and 11/16/07.

Now I know I have a lot of moving parts here, but it seems a reasonable hypothesis to say that supply fell, prices increased enough to bring demand into equilibrium with supply, but not nearly enough when inventories are taken into account. Since inventories have been in steep decline, and since it is impossible to draw inventories down past ZERO, either inventories begin to build, right away; or the price will begin to rise significantly; or inventories and prices can remain in equilibrium right here, but only if supplies increase by the amount of the inventory draw of the past several months; or the WORLD economy, particularly China, India, and the Middle East, must contract enough to ease the pressure on oil demand. (My readers will remember the “chicken or the egg” problem I outlined in an earlier post)

One of the above moving parts has to give. If you can arrive at the correct outcome, and have capital, and the courage of your own convictions... the opportunity is overwhelming. Or you can turn on the tube and catch another exciting episode of “desperate housewives”.

I have made my bets, and I hate TV. Consequently, I find myself in front of this computer trying to make sense of all of this. At this moment, all of the data taken together support a peak in Oil supply for the U.S. as past tense, and perhaps for the world as well.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T0 com
Hypocrisy, self-dealing, disinformation & propaganda, and just plain chutzpa know no bounds.

This just in from OPEC: Indonesia is in favor of increasing OPEC output by 500,000 barrels per day!!!

HAHAHAHAHAHAHAHAHA! Isn’t that a scream?

For those of you who don’t think this is as nearly as funny as I do…

Indonesia, though still technically a member of OPEC, is a NET OIL IMPORTER!! And has been for several years. Of course they want OPEC to increase their output, and hence their exports. What importer does not want that?

And do you know how much political sway Indonesia holds over OPEC? ZIP.

Well, while we are wishing for things… I would like to have black hair, be young, thin, and good looking again! Oh, Sh$#!, I just looked in the mirror… I am still me.

Mentatt (at) yahoo (d0t) com

Monday, November 26, 2007

The U.S. equity market is stumbling terribly, with 10-year Treasury bond yields under 4%, yet the front month contract for WTI crude oil has benn stubbornly fixed above $92 per barrel.

What else would the peak in U.S. oil supplies look like?

Look, the U.S. equity, bond, AND housing markets are all foretelling a recession; why not oil? Maybe oil is foretelling the peak in oil supply is of greater import than the looming recession – or maybe not.

But it sure looks that way to me.

On another note, unless the equity market finds its footing FAST, the Fed is going to be forced to cut, stretching the inflation rubber band into a moon shot for 2009. I am not making a prediction here, but will react to the Fed instead. If they cut rates 50 bps, look for the dollar to crater versus commodities (and currencies).

Who knows? Maybe the only way to save housing is with 1% interest rates (and the resultant $300 per barrel oil)… but even that would only forestall the inevitable.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Sunday, November 25, 2007

The U.S. Air Transportation Association reports that for the first time, fuel has become the single highest cost component – 25.4 %. And fuel was about 20% cheaper in Q3 than today’s price. Meanwhile, FedEx issued its second profit warning in as many months on increasing fuel costs and declining demand.

Major investors in the U.S. automobile industry forecast 2008 to be the worst car market in 15 years.

China’s year over year October oil imports increased 16.5%, while world production declined just under 1 % and net exports of oil declined better than 3%.

Heating Oil for this winter’s delivery are at record prices, while inventories are declining at precisely the time when they were building in the past.

The U.S. Housing market, essentially our only manufacturer, is on the canvas bleeding from every hole in its head. (Where are those experts that were quoted in South Florida’s newspapers in early 2006 saying the market would recover within a quarter or two? Laughing all the way to the bank at your expense, cashing checks from the developers and brokers that paid them, sometimes directly and sometimes through “public relations” firms, for their expert spin.)

Yet the American mainstream media continues to report our energy situation in a “balanced” way, a way that gives equal exposure to the thoughts and ideas of a very vocal, and very wrong, few. A few who clearly did not put their money (or their client’s money) where their mouths were – if they had they would have been reduced to penury and litigation long ago and even the myopic morons calling themselves journalists would be able to clearly see that these emperors have no clothes. A few who continue to make their case in the complete absence of empirical data, while the media continues to abdicate their responsibility of keeping the American people informed and instead continues to opt for Mark Twain’s famous “misinformed”.

For those of us who have worked a lifetime to provide for our families and secure their future, we are at a cusp; choose wisely and prosper, or choose poorly and see your life’s efforts confiscated in a vicious bout of hyperinflation, disappearing home equity, and the shrinking purchasing power of your diminishing sources of income.

The markets are shouting their dire warnings to you in the form of commodity prices and oil supply constraints. On the other side are the establishment Wall Street firms, politicos, and media with a tremendous interest in maintaining the status quo for as long as possible - irrespective of the certainty of the outcome I describe.

What to do? Follow your mother’s advice: DO YOUR HOMEWORK!! And reading the newspapers does not count.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0t) com

Saturday, November 24, 2007

10 year U.S. Treasuries yield below 4%

Gold over $820

Crude oil nearly $100 (as measured by WTI, Tapis crude already over $100)

U.S. housing in an absolute freefall

U.S. stock market underwater for 2007

The U.S. Dollar declining rapidly versus commodities (not to mention our trading partners currencies)

Now let me ask you 1 question:

Which Wall Street firm (besides me) warned you about this?

Not a one.

And you believe them about future oil supplies??!!

Mentatt (at) yahoo (dot) com

Sunday, November 18, 2007

As my readers know, I have been studying and writing about the peak in world oil production for the past several years and its effects on our businesses, investments, families, and our way of life.

The recent, and final, U.N. I.P.C.C. report on climate change has just been released, and while I know that the report has been on the cover of every major newspaper and magazine, I wanted to quickly say that it is not an exaggeration to point out the political solutions to this problem are going to change EVERYTHING in our lives. The report is very direct, forceful, and leaves little room for interpretation and manipulation:

“The world will have to end its growth of carbon emissions within seven years and become mostly free of carbon-emitting technologies in about four decades to avoid killing as many as a quarter of the planet's species from global warming.” As reported in the Washington Post November 18, 2007

Simply put, this means the end of industrial growth, and as life is certainly not fair, there will be winners and losers in the mad scramble about to come.

I will be researching and commenting on this in the future at least as much a I will about oil supplies.


Yours for a better (post-industrial) world,

Mentatt (at) yahoo (d0t) com

Saturday, November 17, 2007

The great commodities “boom” of the 21st Century

Commodity prices will “boom” and the environment might just go “boom”, too. I manage money, not environmental practices, but I recognize that I might be soiling my own nest, as it were.

That said, here is an interesting quote from the International Energy Agency’s (the European counterpart of the U.S Department of Energy’s EIA) lates World Energy Outlook:

“The increase in China’s energy demand between 2002 and 2005 was equivalent to Japan’s current annual energy use.”

Readers of my blog know that world-wide crude oil production is down nearly 2 MILLION BARRELS PER DAY since May 2005 when compared to August 2007, yet Chine has increased their consumption, to say nothing of India, Viet Nam, etc… dramatically. It follows by mathematical necessity that someone else lost oil to ChIndia, Inc.

That would be the U.S., among others, and that is why the price of oil, and everything else, is going to much, much higher, while the purchasing power of your currency, and the real value of your financial assets are going much, much lower.

Don’t blame the politicians, the oil companies, or any other part of the cold cruel world… You have been forewarned, and you are now forearmed.

I received an email from a rather bright, investment banker type (and, no, that is not an oxymoron… I said bright, not ethical) incredulously asking me if I really felt crude oil prices would rise past $300 sometime in the next several years… to which I responded:

“Welcome to the conversation”

Yours for a better (post-industrial) world

Mentatt (at) yahoo (d0t) com

Thursday, November 15, 2007

Energy crisis or food crisis?

I have not commented on the world’s inventory of grains, particularly wheat and corn, lately… and things have gotten much worse than I had warned my readers about last year.

“Global stockpiles of wheat will fall to 109.8 million metric tons by the end of the marketing year on May 31, down 11 percent from a year earlier, the USDA said last week. Farmers worldwide are expected to plant more of the grain to capitalize on higher prices.” Bloomberg New November 13, 2007

My readers might remember that as of last year, “days of supply” for wheat was about 57 days, THE LOWEST LEVEL ON RECORD, down from well over 110 days in 1999. Well, inventories are in free fall, and the world’s population increased 1.3%+ over the past year. We are looking at skyrocketing food costs and shortages of wheat based products.

If you think people will react poorly to gas lines, you should try food shortages.

I have a question: Am I the only guy on Wall Street that finds this vaguely important?

We are deep in the danger zone for wheat inventories. We cannot manufacture wheat, we cannot order it from the Martians, or pray for Manna from heaven. We have to grow it. If we run out, we have to wait till next year for additional supply.

I have another question: Am I the only citizen that thinks our food supply is more important than gay marriage, freedom fries, and Barry Bonds nutritional supplements? Am I the only normal person left?

Mentatt (at) yahoo (d0t) com
Next week I will be traveling by air during the notorious Thanksgiving holiday. Instead of dreading it, I will be savoring every line I wait in, every rude traveler, and every indignity of the security screening process. Perhaps I will get lucky and warrant the full body search it seems every 10th passenger is subjected to.

We have very few holiday-crowed airports left in our oil constrained future to contend with. Delta is going to merge with SOMEONE (looks like United at the moment), and this is only the first of many mergers that will dramatically shrink the number of planes (and passenger seats) in the air. Certainly there will be a great deal of air travel in the future, but as jet fuel (Jet A-1 is very close to kerosene) is a product of crude oil (not natural gas plant liquids, ethanol, etc…) and as crude is in obvious decline, their will be a certain and significant decline in the availability of jet fuel… less fuel means fewer planes and passengers in the air. And that means over capacity in our air travel system.

I wonder if this will improve their on-time arrival performance?


I will freely admit that I have been a shameless capitalist my entire life, and hope to continue for quite some time. However, as an alumni of "the wrong side of the tracks", I think it silly to ignore the political ramifications… For instance, I wouldn’t invest in a personal jet (not that I can afford one) at the moment. It seems politically incorrect (impossible) that our wealthiest citizens would be permitted to consume thousands of gallons of precious fuel on a cross-country private jet flight when working (and non-working, but voting) poor are unable to compete economically for that same fuel to heat their homes. Any student of history will recall that that kind of class privilege while others are being harshly challenged did not work out so good for the folks running things just prior to the French Revolution (I can just see Paris Hilton paraphrasing Marie Antoinette, “let them burn wood”).

A blessed and joyous Thanksgiving to all!

Mentatt (at) yahoo (dot) com
What comes first, the chicken or the egg?

Is a lack of economic growth about to cut demand, and prices, for oil – or is a lack of oil cutting into economic growth?

Stay with me for a second… What does the early economic reaction to lower oil supply look like? Would the headline read: “demand for oil fell this month to”, or “supply of oil fell this month to”? It would look the same, and it would be a “glass half empty or half full” kind of moment, wouldn’t it? Demand, as measured in classical economics, cannot exceed supply as the price mechanism simply chokes off the demand and substitutes appear (what substitute there is for oil, I don’t know). Supply, however, can exceed demand, at least in the short run. That is what inventories are all about.

Looking at the supply and inventory data from the EIA and the price signals from crude oil, my interpretation is that a lack of oil is cutting into economic growth. If the oil supply cannot be expanded, further growth will be impossible. And if that is true, then (you know, that if/then sequence again) further economic growth will not be possible. And if that is true, we are in for one wild ride as the market re-prices all of the myriad financial assets. And if that is true, ______________ (go ahead, YOU fill in the blank)

Yours for a better world,

Mentatt (at) yahoo (dot) com

Monday, November 12, 2007


Finally!! This just hit the various news services:

“Crude-oil prices are being driven higher by ``market fundamentals,'' said Guy Caruso, head of the U.S. government's Energy Information Administration.

Rising demand coupled with ``insufficient'' investment, lack of access to resource bases in the U.S. and elsewhere, and a ``dramatic rise in the cost of doing business'' are boosting prices, Caruso told reporters today at a briefing in Washington.

``We think we're in a different era with relatively higher real oil prices going out through 2030,'' he said. The Energy Information Administration is the statistical arm of the U.S. Energy Department." Bloomberg news, 11.12.07

This is the first report that I have seen in which a member of the energy establishment linked current crude prices with fundamentals. I guess he figured better now than at $150 per barrel.

It would now appear that Daniel Yergin of Cambridge Energy Research Associates and the Energy Information Administration are no longer working together on the propaganda effort.

Mentatt (at) yahoo (d0t) com

Sunday, November 11, 2007

“Markets 101”

How many times in the past 2 years have you read some publication say that the bottom for housing is 6 months away? Who writes this stuff anyway, and why? How do they stay employed when they are so $%^#!! wrong? They keep writing this drek because their masters want them to, need them to, help bring parties to the other side of the trade.

How many times have you seen articles in the financial press telling that oil “could” go to $100. Lots. And how many articles have you seen saying oil prices are unsustainable and could go as low as $60, but $50 is not out of the question? Plenty. Now with oil at $96, and the financial press implying that the top is $100 and the bottom is $50, do you think that there is a single market participant with more than 2 working neurons who believes the press? Would you put up $96, risking $46 of downside to make $4? Do you think these guys have rocks in their head?

Forget for a moment that oil futures expire and cease to exist and that the oil is consumed and will never be traded or produced again… let us just focus on the market for crude oil. A commodity market needs sellers as well as buyers; it is a zero sum game. For every winner, there is an equal and opposite loser. Every dollar of profit that you pocket in a commodity trade would have wound up in the pocket of the contra party to the trade had the contra party not entered into the trade. Pretty simple, really.

Here is my point. The markets are constantly being manipulated by the financial press. Positively or negatively is up for debate, but not the fact itself. After all, if there were no press whatsoever, would the markets be the same? Nope. It follows then that there must be SOME agenda of the journalist, editor, publisher, etc… What might that be? Maybe they really do feel you have a right to be informed, maybe they just want to sell advertising and will shamelessly publish sensationalized BS for that purpose, maybe, just maybe, they have been influenced by the public relations firms that represent their largest advertisers. And maybe, just maybe, these parties have interests that are in direct contravention to your own. Maybe these parties want to influence the market (maybe? Give me a break), as in create sellers who are influenced by the $46 of downside risk for $4 of upside potential insinuated by the nonsense that passes for journalism in the financial press.

Folks, maybe I am wrong, and oil prices will reach $50 before they reach $150, but the market is pretty much equally split on these potential outcomes, hence prices are nearly $100 per barrel. Since the press is not so equally split, and so clearly to my mind is pitching the “oil prices have come too far and will fall soon” idea so hard, many of the “weak hands” have sold and my bet is the buyers will overwhelm what sellers that are left.

Market tops are formed when market participants are “sure” prices are going higher and collectively throw their last dollars at the commodity, equity, housing market, etc… Correct me if I am wrong, but there appears to be sufficient worry, as measured by tone of the financial press, that prices will collapse.

Now this is just market psychology in a normally functioning market. Through in some spot shortages of heating fuel this winter or gasoline next summer and I will be writing about what market panics look like.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Friday, November 9, 2007

In May 2005 world production of crude and condensate = 74,298,000 bpd, and in August 2007 world production = 72,512,000 bpd, a decline of 1,756,000 barrels per day of crude and condensate from peak month to most recent month. During this time prices have risen roughly 60%; in other words the market brought the decrease of supply and into equilibrium with demand via price. Just in case I need to spell it out for you: The market mechanism of increasing prices failed to stimulate increased production. Why? Maybe no increase is possible.

If we use annual averages, world production of crude and condensate stacks up like this:

2005 average production - 73,807
2006 average production - 73,544
2007 average production - 73,093

(My goodness, even an economist, or a politician, can see a trend forming…)

Peak production of “all liquids” (crude and condensate, natural gas plant liquids - primarily ethane, propane, butane, and isobutane, ethanol, bio-diesel, coal to liquids, etc…) in August 2006 = 85,467,000 barrels per day, and in August 2007 production = 83,920,000, a decline of 1,547,000.

If we use annual averages, world production of “all liquids” stacks up like this:

2005 average production - 84,631
2006 average production - 84,603
2007 average production - 84,335

In order to compare “apples to apples” I should use the crude and condensate production numbers from August 2006, but I won’t… I can see your eyes glazing over. Let us just leave it with: the rate of decline in “all liquids” is slightly less than the rate of decline for crude & condensate. (If you really are interested in the actual figure for crude & condensate production in August 2006 it was 73,760,000. You can work the rest out.)

But “all liquids” are not created equal. For instance: 1 gallon of gasoline = 124,000 Btu, while the energy content of ethanol is 83,333 Btu’s per gallon, and 91,000 btu’s for 1 gallon of propane. If your car could run on 100% ethanol you would need to buy roughly 50% more fuel to drive the same number of miles (or drive 1/3 fewer miles on a tank full).

Let me get to the point: While the decline in “all liquids” from 2005 to 2007 is .35 of 1%, the BTU decline is roughly double that. This does not take into consideration the energy consumption of ethanol, bio-diesel, and coal to liquids production, which to get back to comparing “apples to apples” would need to be subtracted from the “all liquids” gross Btu content.

The production data continues to support a peak of crude oil production in May of 2005, with 2.25 years of data, and the “all liquids” data is telling us not to expect any miracle from “alternative fuels”. I’ll let the academics split hairs over the date of Peak Oil. If you are a resident of the U.S., Peak Oil is in the past, and if you are an investor you have precious little time to do something intelligent.

I want to finish by saying that I do not “hope” for any particular outcome. I trade and invest for a living. If the data showed oil supplies were increasing, my strategies would change. I don’t fight the data, or as they say on Wall Street, “don’t fight the tape”.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Wednesday, November 7, 2007

“Jokers to the left of me, Jokers to the right, here I am. Stuck in the middle…”

Several days ago I wrote about (CNBC) the Cheerleaders, Inc.’s own Larry Kudlow and his call that oil was a short and that as a contrarian he would go long (own) the bank stocks. If I was dismayed then, I am incredulous now.

Here we are, on the cusp of the greatest challenge to civilization since the advent of the squalid criminals of the Third Reich (though the dirt bags don’t deserve the capital letters), an energy crisis of mythic proportion, and all the captains of industry (titanic) can say is to advocate that you invest your hard earned assets into a doomed sector. Me thinks they need some suckers to unload their positions on. Don’t fall for it.

Just look at the banking stocks – they are cratering. We could see $150 to $350 billion in write offs, and no new business coming in. Many of these banks might have to raise capital by issuing more stock, but don’t worry… the Fed is going to be right there for these guys and will print an ADDITIONAL ½ TRILLION dollars to bail them out and destroy the value of your savings.

People thought the housing crisis was bad 4 months ago… Ha! That was sooooooooo August of 2007. Things are so bad right now it is impossible to assess where exactly we are or what anything is worth, which is why the bank stocks like Washington Mutual and Citi look like incoming mortars, and the hits keep coming. As it is impossible for ALL of us, or even a significant percentage, to sell our suburban homes and move to small farms or walkable cities (after all, who would we all sell to?), by mathematical necessity, the investments we have made into these car centric assets (liabilities, actually) will contract so significantly as to be surreal. We are months, not years, from the point where the future consequences of Peak Oil/Peak Oil Imports will become common, man on the street, knowledge. As that wave crests, the rush of folks to the other side of the boat will be more than a little disorienting.

If you think you can avoid risk by going to cash, I got a bridge to sell you and some swampland, too. Same with bonds.

On another note, don’t be taken in with the “oil is at $100 and the global economy has not collapsed” argument.

Of course the GLOBAL economy will not collapse based on oil prices. After all, commodity trading, including international trade, is a zero sum game – for every winner there is a loser. It is not the PRICE that is the problem for the GLOBAL economy (I want to make very clear that the GLOBAL economy and the U.S. economy are not one and the same anymore), the problem is the aggregate supply of oil, and that my friends, is not going anywhere but down. And while the GLOBAL economy can withstand higher energy prices, the importing nations, particularly the U.S., will feel the ill effects, as the price of oil goes up faster than imports come down our deficit widens. Can you imagine if we were able to import significant liquified natural gas? For better or worse, the oil portion of our trade deficit issue will crest as the aggregate value of imported oil declines with aggregate volumes. What happens on the other side of THAT is worth considering and I shall do so in another post.

"I do not concern myself with why. Sometimes I think in terms of where, other times when... and always how much." 6 days of the Condor.

Mentat (at) yahoo (dot) com

Tuesday, November 6, 2007

Yes, this means “Peak Oil”, and all of its myriad consequences, is real and will dominate every aspect of your life FROM NOW ON.

But first, our quote of the day:

"Blaming the speculators is a lazy explanation. There is a genuine problem here," says Paul Horsnell, the head of commodities research at Barclays Capital.

And our other quote of the day:

“Eventually, all currencies (except gold) go to zero. The only difference is the speed at which they get there. Warranted or not on relative merits, the U.S. dollar is winning the race among major currency pairs.” – Michael “Mish” Shedlock

Or as a famous mob hit man was reported to have remarked just prior to sitting in New York State’s electric chair, “I never killed nobody who wasn’t gonna die anyway”.

I never thought of it that way, but ALL currencies eventually go to zero, and the U.S. Dollar is no exception. It is just that the denial and unrepentant mismanagement of our currency by the powers that be staggers the mind. I don’t have to point out that the price of crude oil keeps setting new records, and is just 2 bucks from the magical “$100”. It is, and if you have been reading my stuff for a while and held cash instead of energy and precious metal plays, you might feel a little sheepish… AND YOU SHOULD. Now get over it! Why would you prefer to own U.S. Dollars instead of a diversified portfolio of energy equities and commodities? Would you short the energy sector and go long the U.S. Dollar? Well that is exactly what you are doing.

You have little time to take action. After that its “woulda, coulda, shoulda”.

Let me repeat that which I have been ranting about for several years now: Oil is $98, a new record. The U.S. $ has broken below 76 on the dollar index, a new record. Gold is $835… This is not a coincidence!

Mentatt (at) yahoo (dot) com

Saturday, November 3, 2007

“I am right, the whole world is wrong”

That seems to sum up the simple minded reasoning of the “energy cornucopians”, with Daniel Yergin their chief Elf saying:

“Oil prices are becoming increasingly decoupled from the fundamentals of supply and demand,” Dr. Daniel Yergin, chairman of Cambridge Energy Research Associates, said today in Washington D.C. “With prices over $90 a barrel and strong anticipation of $100, the oil market is showing signs of high fever, stoked by fears of clashes in the Middle East and resulting disruptions of supply.” -Front Page, CERA website, October 29, 2007

You got that, you dumb ass oil traders? You guys (that would include me) are all wrong!!! You don’t know what you are doing!! Daniel Yergin, Pulitzer Prize winning author and economist, Master of Time, Space, and Dimension, Wizard, and Grand Pooh Bah says we are a bunch of dummies and we know the price of oil and the value of nothing!! The “Fundamentals” do not support the current market price!!!!

OK, I’ll bite.

Dear Dr. Dan “The Man” YerGan:

What f#$%%!! fundamentals are you referring to? Why do you not publish your data? Please! Just post your summary data on the largest 50 oil fields! Then we will actually have something to compare the supply and production data to when it comes in. You know, that pesky “scientific method” you’ve heard tell about while completing your Doctorate. Even a dumb trader like me has heard of the “scientific method”, and I don’t have the benefit of a Ph.D.

The following is from G.R. Morton’s website:

February 2002
Technology may help combat volatile oil prices, study suggests.... 
$6.95 - Oil and Gas Investor - - Feb 1, 2002
"oil prices are projected to average $20 a barrel in 2002, compared with approximately $26 in 2001, CERA president Joseph Stanislaw said."
What was the reality? Well in 2001, according to the BP Statistical World Review of Energy, the price of WTI averaged $25.93. CERA predicted $20, but BP says the actual number was $26.16--totally in the wrong direction. The price went UP, not down as CERA said.

February 2003
US commercial oil stocks reach low 
Subscription - Financial Times - Feb 20, 2003
"Cambridge Energy research Associates (Cera), the Boston-based consulting group, expects world oil prices to drop after any war to the low to mid $20 range."
The reality was that the average price in 2003 was $31.07 and the price never did fall into the low $20's range after the Iraq war.

February 2004
As Demand Rises, Oil Firms Focus on Finding New Reserves, Expanding...
$6.95 - Dallas Morning News - - Feb 11, 2004
"Oil prices are expected to remain in the upper $20 to low $30 per barrel range through 2005, CERA Analysts said Tuesday. "
The reality was that the price ended up at $65 at the end of 2005. Wrong again.

June 2005
Putting a cap on oil supply worries.
Subscription - Dallas Morning News - HighBeam Research - Jun 22, 2005
"The growth in oil supplies could force prices well below $40 a barrel as early as 2007, The CERA report said."
This is a full paragraph report on the same claim
"In a June report, CERA said it believed that between now and 2010 there will be a substantial increase in worldwide oil production capacity, providing a supply cushion of 6 million to 7.5 million barrels per day that could cause oil prices to "slip well below $40 a barrel as 2007-08 nears."Peter Enav, "Uncertain Saudi Supplies Hold Key to China's Growing Thirst for Oil," Pittsburgh's Post-Gazette,
This year, started at oil in the mid $50s but as everyone knows, we are now at $80/bbl. Cera's perfect record continues.
It was this prediction, which caused Jeff Brown to declare "Daniel Yergin Day," when, contrary to Yergin's prediction of $38/bbl, the price reached twice that value in little more than a year!

As near as I can tell, CERA and Yergin took 2006 off and didn't predict future prices. Indeed, the few comments made in 2006 seemed to indicate that Yergin and CERA were beginning to get the idea that the fundamentals of supply and demand were favorable for higher prices. Yergin was quoted as saying:
“The world oil market is in the grip of a slow-motion supply shock, in which a $70 to $75 barrel price reflects an aggregate disruption of over 2 million barrels a day,” Daniel Yergin, the chairman of Cambridge Energy Research Associates, said in remarks this week at a Washington energy conference.
But, it appears that he was right, but for the wrong reasons. On July 15, 2006 he ascribed the rise in price to geopolitical tensions:
Subscription - All Africa - HighBeam Research - Jul 15, 2006
"the oil price has become a register of geopolitical tensions and fears," said Daniel Yergin, who heads Cambridge energy Research Associates."
According to this theory, I presume, if Rodney King had his way, and we could all just get along, oil prices would plummet. If this is the true explanation for the rise in oil price over the past 5 years, the world must be becoming more geopolitically tense and fearful.

June 2007
But as we enter 2007, Yergin and CERA are back pounding the drum that oil prices will fall. This is what I heard Yergin imply on Larry Kudlow's program. It reflects what he said in print earlier in the year. In June, 2007, a Yergin interview reported this:
"ISTANBUL, June 27 (Reuters) - World oil prices will drop to the low $60 range by the beginning of next year as long as the security premium in the world oil market does not rise, said Daniel Yergin, chairman of Cambridge Energy Research Associates. "

OK, I am back.

Now look in every article you see in ANY media story about future oil supplies. Notice anything? Why is Daniel Yergin the media go to guy in over 80% of the articles on oil supply in Lexis/Nexis? The guy has NEVER been right in his prognostications on oil prices, so again, why is he the "expert" the media wants to talk to? Because he won a Pulitzer Prize?

Wikipedia says of the Pulitzer Prize:

"The Pulitzer Prize, pronounced /'pʊl.ɪt.sɚ/ ("PULL-it-ser"[1]), is an American award regarded as the highest national honor in print journalism, literary achievements, and musical composition. It is administered by Columbia University in New York City."

How, exactly, does that qualify Dr. Dan the Man YerGan as an expert on Oil prices? Particularlly since he hasn't been correct on Oil prices since Noah built himself a boat? And who in their right mind would continue to hire this meally mouthed cheese brain and his inept forcasting firm when they could have hired someone who has been DOBA (if you don't know these acronyms just Google them), like yours truly? I will tell you who - parties and organizations interested in misleading the public for their benefit - and your detriment.

Folks, you are being purposely misled. By whom, and for what purpose, well, that is another story. Not much into conspiracy theories myself. But this is just too much coincidence for your BS meter not to be going off in the red zone.

"That's all I have to say about that" Forrest Gump

Mentatt (at) yahoo (dot) com

Thursday, November 1, 2007

More terrible advice from the denial factory of the American Main Stream Media

On Tuesday past, the price of WTI December crude oil contracts fell $3. That night, Larry Kudlow, an economist with his own CNBC TV show, made the suggestion it was time to short oil and go long the banks (betting oil was heading down and bank share prices heading up. The very next day, crude oil surged nearly $6! And the following day, the bank index fell 5.14 %! Great call Larry!

The energy crisis is a major component of the housing crisis, which is a major component of the coming banking crisis.


Today Exxon reported earnings that disappointed Wall Street. The coverage was focused on their troubles in refining. My eyes focused on this:

“Oil and natural-gas output from Exxon's wells dropped 2.1 percent to the equivalent of 3.92 million barrels a day, led by a 14 percent decline in crude production in Africa, the company's biggest source of oil. Lower output more than offset gains from higher crude prices, the company said.” Bloomberg News

Big oil’s production has been in decline for several years. Oil prices have risen 800% this decade, but the big guys have seen their production decline. What else would Peak Oil look like? It would look just like this.

Keep your eye on the ball. Trumpets will not blare, nor the earth to quake. The economic fallout of declining energy supplies will more likely be a slow, grinding, wearing event punctuated by periods of rebound. That is, until the concept becomes conventional wisdom – at which point the political and social fallout might make the economic fallout pale by comparison.

Mentatt (at) yahoo (d0t) com