Wednesday, August 13, 2008

US$ rally over, Oil Bottom In*

Never used an asterik in this Blog before. First time for everthing, I guess.

The inventory numbers came in, and they were nothing short of horrific. Read it for your self.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.4 million barrels from the previous week. At 296.5 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 6.4 million barrels last week, and are in near the lower boundary of the average range. Both finished gasoline inventories and gasoline blending components inventories decreased last week. Distillate fuel inventories decreased by 1.7 million barrels, and are in the upper half of the average rangefor this time of year. Propane/propylene inventories increased by 2.0 million barrels last week but remain below the lower limit of the average range. Total commercial petroleum inventories decreased by 5.4 million barrels last week, andare in the lower half of the average range for this time of year.

Here are the numbers. So much for "Demand Destruction". Gasoline inventories are down 12 million barrels from this time last year, over 10%, and at a time when we need to be BUILDING inventories of heating oil, we are still having draws in distillates.

I must admit that I missed the Strategic Petroleum Reserve threat, but the more I think about it, the more I think it really is just a threat.

Even a President Nancy Pelosi, and when it comes to economics and energy a bag of hammers would kick her ass in a game of checkers, would not be so dumb as to actually pull that trigger. Well... she IS that kind of dull... but hopefully the folks at the DOD and the CIA would point out to WHOEVER is in the Oval Office that once you pull that trigger, you now have emptied the last bullet from the U.S. energy gun. We shot our load on ethanol... nuclear has been a dud... the other alternatives are a decade (or 2) away... would any President, even a liberal Democrat, (even the BUSH administration!) be silly enough to take our last pawn off the table? After all, all OPEC would have to do is take 1 million BPD off the market for a measly 50 days, and we are right back where we started.

Look, the Democrats are "kinder and gentler", and America desperately wants a reason not to vote for a Republican (and rightly so - they want to punish the Republicans for the ineptitude of the past 8 years), but the Democrats really are the second team when it comes to the hard decisions, likely because many of their constituents need protection in a competitive world. Still, my bet is they would come to their senses before doing anything so dumb. My bet is that was just campaign politics on the part of Obama (And my hat goes off to him. Republican opperatives are infinitely smarter than their counterparts, with the exception of Clinton's first term team... now those guys (Carville & Co) were SCARY!). The funny thing is, he sort of stole the idea (I believe) from Newt Gingrich, of all people! Not that this silly idea has not been knocking around the Democratic circles for a while, but Gingrich's famous speach unwittingly gave Obama some excellent cover. Like him or not, Obama is neck and neck with Bill Clinton as the best campaign politician of the last 50 years. JFK wasn't even close to these guys.

But I digress...

ALL of the commodities got a bid today after the 10:35am oi inventory report hit the web. ALL commodities are now driven by Oil, one way or the other. Just pull up a day chart for DBA, the Powershares agriculture fund. Notice anything?

Energy equities, Oil, and precious metals are again the place to be. The U.S.$ is back to having to justify itself, and that is only going to get worse as the price of Oil goes up and inventories in the OECD, and the U.S. in particular, g0 down.

Fannie and Freddie are sunk. Glug. Lehman's body was found hanging by a rope in the garage; they cut him down, and are applying CPR, but even if they can resuscitate Lehman, its too late. Lehman might live in a vegetative state, but I think you can put a fork in it. Citi will only survive because the Feds are going to defend Bank of America, JP Morgan Chase, and Citi. SOMEBODY has to be able to hold payroll deposits without defaulting before the funds clear. Can you imagine 10 million worker's payroll checks bouncing because of the FDIC's $100k limit on protecting deposits? Well, these are the banks that hold those payroll monies.

The US $ had its dead cat bounce, but it is over. Get while the getting is good. The sell off in Oil is over, and that was what was supporting the US$. Now we need to look out to the Credit Default Swap nightmare, because that train has left the station, and it is on its way here.

What to do (and don't). Don't try and expand your business. Instead, take every penny off the table and buy hard assets. Don't hold US$s. Don't hold corporate bonds (Just pretend that Wall Street bond salesmen are selling MALARIA, that will help you get in the right frame of mind). DON'T buy brokered CD deposits!!!! Don't hold banks! Shrink your overhead! Do not be tempted by Real Estate, it has a LONG way to go (DOWN)!! Prepay any tax liabilities to avoid holding over 100k in any bank except the big 3.

Looking at the above supply data from the U.S. Department of Energy ANY unexpected, uncalculable event (hurricane, act of war, accident) could drive oil well over $150, maybe over $250. If you want to be long US$ with this hanging over your head, you need to take a refresher course in probability theory. Skip the course. Exchange $'s for hard assets.

And stay away from Wall Street salesmen. They are infected and highly contagious with Mad Bullshit disease. If their silly "asset allocation" model of business was worth a shit, then why did hedge funds conquer the financial world (at their expense)? If G.M.'s Volt was worth a shit, why isn't G.M.'s stock price going to the moon? The markets are not perfect discounting mechanisms, but they are better than the media, and INFINITELY better than Wall Street salesmen.

Good Luck

Mentatt (at) yaho0 (d0t) com

* if the SPR is tapped, the bottom is not in


Anonymous said...

Credit default swap nightmare already in motion? Would you have any thoughts as to the nature and extent of this situation?

Greg T. Jeffers said...

In the very near future i will be posting on the CDS issue in great detail.

But let me lead by saying that that the event that triggers the chain reaction nightmare that the CDS is, is unknowable. Maybe it is a GM bankruptcy filing, maybe it is a spike in Oil that causes another big debtor to default... your guess is as good, and maybe better, than mine.

Still, the outcome will make sub prime look cuddly