Monday, December 6, 2010

Back in the Land of the Philistines

$90 Oil with 17 % real unemployment (U6) means recession.

Oil prices have to come in soon.  If they hold here, or worse, head higher, it means Peal Oil (and Peak Imports) is here, with all of its attendant issues, in my opinion.  The simplest explanation is usually best.

Like any rational trader I spend nearly all my time feeling like a guy balancing on the back 2 legs of a chair, almost falling backwards, and then catching himself.  You know that feeling... I feel like that ALL the time...

There is NO WAY producers can pass costs onto the consumer... especially when higher energy costs are emptying out the consumer's wallet... this does not have to be the case in the Oil market... Oil price is likely an equilibrium indicator, as their are no substitutes for the most part and the supply appears to continue to contract... how this all works out still depends upon the rate of change more than total change (I think).

House prices continue to contract while silver continues to soar... Food prices have risen even though percentage of people that cannot afford to pay for them has increased dramatically... Our leaders are willing to go further into long term debt in order to fund today's unemployment compensation.... these statistical anomalies will only get much, much worse if Oil prices rise further (and Peak Oil is here).

Oil is at its absolute resistance point.  If it breaks thru it, look for much higher prices.  If not, look out below.  I am long, but like the guy balancing on the back 2 legs of that chair, I am always thinking about not crashing in a heap on the floor.

12 comments:

kathy said...

Why does this not have to be the case with oil prices? I'm so glad to see your post. I am trying unsuccessfully to figure out just what is happening today.

Greg T. Jeffers said...

I could have been more clear...

What I meant in that passage is that OTHER producers - clothing, food, toys, hardware.... are going to have a very difficult time passing costs on in the current U.S. employment environment.

Oil, on the other hand, MIGHT (notice the capital letters, please) have reached the supply contraction point whereby cost increases are in fact passed on as the means of bringing demand into equilibrium with supply... not that prices won't effect demand, they will, but the ROW's efficiencies, currencies, and desires might lead them to bid Oil up in $$'s while at the same time Oil's historical elasticity of demand has been less than 1.00, it might in fact be falling briskly because of all the aforementioned.

Sorry.... I need to express this better... I am writing this in the back seat of our van on our way back south...

kathy said...

Okay. Now I've got it. Sort of. Thank you.

westexas said...

http://graphoilogy.blogspot.com/2007/04/elp-plan-economize-localize-produce.html
ELP Plan (April, 2007)

In this essay from early 2007, I thought that the best way to describe what we were headed for was for deflationary trends in the auto/housing/finance sectors versus generally rising food & energy prices. Rinse & repeat.

I don't know if the 2009 to 2019 oil price increase will look like the 1998 to 2008 increase, but the year over year increase from 2009 to 2010 (about 20%/year) is the same average rate of increase that we saw from 1998 to 2008.

In any case, if we extrapolate Chindia's current rate of increase in net imports, as a percentage of global net exports, Chindia in 2019 would be net importing about half of global net exports (versus 11% in 2005).

bureaucrat said...

There is lots of oil available -- the EIA "oil stocks" chart says so. We are not near a crisis point yet, which means any escalation of oil prices is because of speculation only (investors like me trying to jump into the investment of the century).

Expect the oil prices to get slapped back down soon enough by a slowing economy, like you said. But the prices say nothing about peak oil or oil shortages.

World oil production started plateauing 6 years ago. It is only a matter of time for the (world) oil stocks and gasoline stocks to start going down. But the charts do not reflect that ... yet.

Greg T. Jeffers said...

Bur:

Do you ignore what has been said here on purpose?

Here are 2 very important facts:

1: Oil prices are at 2 year highs

2: Inventories are reasonable high

Now, how to explain the dichotomy? I postulated that it could be the beginnings of hoarding in one of my posts last week... and I am not the only nut on the tree. JH Kuntsler mentioned hoarding as a possibility today on his blog...

Of course, we could be wrong. When trading commodities, there is ALWAYS a buyer and a seller. For each and every contract. Guess what? Only ONE of them gets to be right on that particular trade. Every dime that went into the winner's pocket came out of the loser's pocket.

I am long Crude and Nat Gas. Am I sure that I am correct? Not even a little bit. If I am correct I intend to hold for as long as I dare. If I am wrong, I intend to sell before too much harm comes to me so that I will live to fight another day.

To me, this is another moment of truth for Oil. Odds are it pulls back... except it hasn't. Look around you. Employment is DEAD in the U.S., the place where over 20% of the world's fuel is consumed.... Is Oil causing this condition? We won't know till after the smoke clears. Certainly high unemployment is NOT causing high Oil prices... which begs a question: What would the price of oil be if employment was surging? And could employment surge if Oil imports decline? In both cases the rate of change has a great deal to do with it.

IF, and its a big IF, there is no spare capacity, we will know it soon - Oil prices will remain relatively high... and good spike again.

IF there IS spare capacity... then this is a false alarm and the longs will have to get the hell out of harm's way.

I think we will know one way or the other VERY soon.

DaShui said...

I went to a speech Friday by the Indian Ambassador-Mrs.Shankar (We can call this post Jeffers-Leaks).And she proved to be as clueless or lying as all diplomats. She said growth in India will be almost 10% this year and 10% for at least the next 10 years at least and probably into infinity.
India + China = 1/3 of the world betting on high economic growth to keep from imploding socially.

Dextred1 said...

http://reason.com/archives/2001/01/01/americas-most-dangerous-politi

Jeffers check out this link to Gary Johnson GOvenor of New Mexico. He is suppose to throw his hat in the republican ring and I think you will like him

Donal Lang said...

Greg; to me it seems we've reached the point where the Export Land Model (thanks Westexas) coupled with fast increasing Chindia demand, and a futures oil and gas market predicting the obvious, have all conspired to sideline U.S. marginal demand.

You're right that US oil demand is inelastic (even in a deep recession), so until the price rises destroy oil-consuming capacity, people and companies will shift their spending to continue to buy oil - they have no choice.

It also means the recession is permanent - there's no profit available in this oil-based system at $90+.

Greg T. Jeffers said...

Donal:

I think that that is essentially correct. Emphasis on the word "think" as in "to believe"... THe price action will reveal all, I think (again).

westexas said...

Re: Donal Lang

Also, I think that it takes a higher price to kill demand as forced energy conservation moves up the food chain.

As noted previously, if the 1997 to 2009 annual oil price pattern holds going forward, we are looking at an average rate of increase of about 20%/year, and the next year over year decline will bring us down to the $120 range (average annual price). Time will tell.

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