Wednesday, December 24, 2008
Just when you think things can't get worse, they drop a piano on your head
Oil fell $3 today. 12 more days like today and oil will be at ZERO.
After we blew out of our Oil positions this past July, the commodity floor broker for our fund asked me when I would be willing to go back in. I told him I would get excited about Oil again under $80 (we sold when the front month was about $132, on its way down from $147 although our contacts were for 2010). At $80 he called me and said "OK, it is $80". I told him it is still going down. He asked me when I would be willing to take a position. I said "when it stops going down". He replied, "how will you know it stopped going down?" I said, "when it starts going up".
Oil has not had an up week since then (actually, it had 1 up week).
If REAL unemployment hits 15%, which I think is quite possible, Oil could fall under $30. That would be a hell of a price to pay for cheap oil, but it could happen. It would mean that gasoline is down around $1 per gallon, but no one could afford it.
The depletion rate from the world's exiting fields is, according to the IEA, around 9%. IF THAT IS TRUE, sometime in the next 36 months the U.S. would experience a significant Oil shortage irrespective of 15% unemployment (and unemployment won't stay there... Obama's team made it clear they would employ half the country to dig holes in the ground, and the other half would be employed to fill those holes back in).
The world burns 30 billion barrels of Oil per year. 2008 has been an excellent year for Oil discovery - the highest estimates I have seen is 8 billion barrels of ultimately produced Oil. Hmmm.... if we use 30 billion per year, discover 8 billion per year, have demand decline by 4%, and deplete the world's 75 million of C & C production at 9%.... how long before the demand axis is superior to the supply access? Not very long.
That does not mean that Oil could not go to $20 per barrel in a deflationary spiral. It just means that the probability is very, very low.
When the turn comes, it will be the opportunity of a life time. Surviving until then is the problem. Think about it: Trading Oil from $35 to $70 is the same as last year's $75 to $150, and a lot more probable.
The Bank of Spain's Chairman sees things my way. Nobel Laureate Paul Krugman, too. There are too many optimists out there trying to convince you that we will turn the corner in a couple of quarters. We MIGHT be able to re-ignite inflation and destroy the US$ in a couple of quarters (and maybe not) but in real terms we will still be sucking wind.
There ARE opportunities for investors; they just aren't where the man on the street is looking. I will give you a hint. Why would you buy common stock in a company when you can buy senior debt, at a discount, and get a current yield of 8, 9, 10% +... with the added upside that if the company actually survived you would make a capital gain on the difference between the face amount of the bond and what you paid for it? And I am talking name brand companies here. I don;t give specific advice in this forum, but if you can read this you can search these out in Moody's and Standard & Poors at your local library.
Mentatt (at) yahoo (d0t) com
Posted by The Short Story Man at 1:43 PM