Monday, October 25, 2010

Its All about Oil, Again

Oil has caught a bid and is now trading well above $83 per barrel for winter month delivery.  At these prices, the energy equity market vs the oil market tells me that either Oil is very, very over priced... or energy equities are very, very underpriced. Given the Fed's absolute determination to QE (destroy the US$) our way to recovery, we can't even count on the other nations killing their currency equally.

The American economy is not the driver of energy company earnings - Oil prices, and to a lesser extent Nat Gas, are. And yes, I know Nat Gas has been murdered... my sense is that a lot of that has to do with an outrageous access to credit for the Gas producers and drillers - especially the smaller and marginal players.  Frac-Gas costs over $6 per mcf to produce, and Nat Gas front month is in the mid $3's... believe me when I tell you there will be bankruptcies in that space and that the market will force these dopes out of the market.

If Oil holds up and Nat Gas stops getting killed, energy equities will out perform by a wide margin.

This not a recommendation.  Just an observation.  Energy prices could head south, and if they do, energy equities will NOT be cheap.


Oil imports into the U.S. have fallen 3.5% so far this year when compared to this date in 2009 - total petroleum imports are now under 10mm bpd.  TOTAL world oil exports, that is Oil being sold internationally by the Oil exporting nations, has fallen over 5% since 2005.  Meanwhile, world population has increased by nearly 6% during that time.  The rest is fairly self-explanatory.


bureaucrat said...

Which brings us to the stock market, which just rises and rises .. yet 70% of stock trades today are by computer, following some formula or momentum.

So you put these rising oil prices together with a weak economy, and we should see everything, including the NYSE, come crashing down .. again. The solution to high prices is prices, and if commerce/individuals can't afford these higher oil prices, they are gonna retreat, and stop buying. Down comes the oil prices, and down comes the economy. Oil is a self-regulating industry.

bureaucrat said...

... the solution to high prices is high prices, I mean ...

Bill said...


I'm curious about an earlier thread. I was out of town and didn't get to ask.

You say that we should raise taxes on the rich and that would solve all of our problems. I don't have an issue with taxes on the rich but I don't think we can do squat without cutting spending.

With $13T in debt and $100T in unfunded liabilities how long would it take to get back to even under your plan? What are the actual numbers you are using?

Anonymous said...

It's all about oil, and it's all about QE. Mish did a good post about inflation in China, and how price inflation there is going to spill over into price inflation here. Commodities are rising because of the money printing. Artificially low interest rates in the West are causing money flight to the developing world. As well, our balance of trade deficit causes the same problems. Our loose money policies are causing price inflation in the rest of the world. We will have no wage inflation here while there are 20,000,000 unemployed in this country. Oil, food and clothing will all be on the rise. Our government's cheap money policies will impoverish us.


Coal Guy

tweell said...

Instapundit was just pointing out two articles about food shortages and a strong La Nina lowering temperatures.
Given that, natural gas prices will be climbing as more is used to heat buildings and generate electricity.

bureaucrat said...


It is simple math. The people demand $14 trillion in spending. And the top 5 programs (80% of spending will NEVER be meaningfully cut. So, you have to generate $14 trillion in taxes somehow (or borrow $2-3 trillion each year, as we have been doing).

Jeffers wants us to believe the taxable income amongst the rich just isn't there. That is crap. The most expensive restaurants in Chicago (Charlie Trotters, Everest, True, Ambria, etc.) are still open and doing great business. I see lots of BMWs and even a Ferrari now and then here. There is LOTS of money in the upper 20% of income earners to tax. I gave myself (and my rich parents) as an example.

If you don't want to pay for the programs cause you don't want deficits, then don't. And if you are an elected politician, the taxpayers will run you out of town on a rail.

Bill said...


Those aren't actual numbers. Saying it's there and proving you can find the money to solve the issue are two different things.

What are the actual numbers and how long would it take to bring us out of debt, meet our unfunded liabilities and provide the services you say we can afford?

bureaucrat said...

Actual numbers are a waste of time, as they will never "hit" exactly. I don't do exact predictions. I deal in themes. :)