Thursday, December 9, 2010

Oil Consolidates its gains

"(Sec of State) Clinton stated that "lives are at risk" but having lived through the Pentagon Papers and Watergate I think the real issue is that lies are at risk." - Thomas Cornick, my cousin and genius par excellence.

Oil prices have remained firm, consolidating their gains at just under $90 per barrel.

While China's equivalent of the U.S. SPR is contributing to the firmness, that is hardly the whole story.

Booming (relatively) economies within the exporting nations has far more to do with this issue than China alone.

This is not to say that China might not upset the markets by tightening credit (or if their property market blows up).  There just ain't no such thing as a "sure thing" trade. That would include Oil.

If you are an investor and are not concerned with the China property issues you might not be an investor for long.  That market freaks me right out of my skin.  Right now I am long, but I am not "long and strong".  Even if OPEC is expecting $100 Oil "Pretty Soon".

Oil has a nasty habit of dropping other markets to their knees...

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Mexico's Oil production is in steep decline, and Mexico's exports to the U.S. will approach ZERO sometime in the middle of this decade at the current rate of decline.  Contrary to wishful thinking, no amount of investment in "other fields" is going to make up for declines in a field like Cantarell.  That field was one of the giants, along with the North Sea and the North Slope, that brought the world back from the brink in the 1970's... but all of those fields are declining briskly... and now 5 nation's hold all of the Oil cards...

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In a country where 15% of the population needs government assistance in order to eat and where 17% are out of work and desperate... I think it is the HEIGHT OF FOLLY to drive around in a $200,000 car, wear expensive jewelry, designer clothes, or any other marker of wealth.  You have to be out of your mind to want to draw attention to yourself.  I cannot envision an environment where these sorts of incidences do not increase.

Take it from someone who has traveled safely in the back country of places like Columbia, Puru, Nicaragua, Brazil... do not tempt anyone.  "Invisibility is the best policy".... even better than honesty in this case.

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More on my pet-peeve on sports caused spinal chord injury and chronic traumatic encephalopathy... just another "freak accident"?  The data is in... Peak Oil, Schmeek Oil... you need your brain and you need your spine... and you need them in perfect condition.  I used to be heavily involved in Mixed Martial Arts... no more.  Grappling and wrestling will continue to be interests of mine, but watching young men engaged in injuring each other's brains in a cage has lost its appeal.  If you have a kid playing or interested in playing football, get him a tennis racket.

24 comments:

westexas said...

"Cheap is the new chic."

Bill said...

"Dirt is the new black"

bureaucrat said...

Mexico may be dropping in oil production but it seems to be dropping VERY slowly. In September they shipped the U.S. 1,098,000 barrels. The month before: 1,158,000 barrels. For all of 2010 so far, an average of 1,116,000 barrels a month. Last year (2009) averaged 1,119,000 barrels a month. Hardly going off a cliff .. yet ...

Anonymous said...

I gave up grappling a few years ago as well, although the UFC type training is amazing for all around physical conditioning--the fighting aspects still puts your joints at risk, and of course your brain.

I was an amateur kickboxer in the early/mid 90's and the time came to either go for it and take a professional fight, or to quit--and focus on college. I choose college. Heavy duty regular sparring just was too much, even blocking a roundhouse kick to the head would shake the brain good.

I like the fighting arts for the conditioning, flexibility, and discipline aspects--but the wear and tear of fighting is immense, and that's if your good. If you are not so good--your going to lose a lot of brain cells.

So what country is picking up the slack, I thought Venezuela, Mexico, Canada were our big 3, are we going to have to start getting more oil from the M.E. now?
-Meiyo

bureaucrat said...

Per the US EIA, the top 5 are ..

Canada
Nigeria (finally coming back online)
Mexico
Saudi Arabia
Venezuela

Greg T. Jeffers said...

Meiyo:

Wow... we seem to have much in common... funny ol' world...

Greg T. Jeffers said...

But think grappling is reasonably safe... or maybe I am just justifying that which I need to justify... I am just not ready to accept golf... rolling is my release, and I like the comraderie of it all... but I have seen enough to know that MMA is just as inexcusable as boxing.

Donal Lang said...

Here's a thought; if China decided NOT to buy just one auction of US Gov bonds (or even SAID they weren't going to), there'd be an almighty crisis of confidence, the value of the dollar would collapse and along with it, the US economy.

The US couldn't afford to buy oil anymore - it would have nothing to pay for it with. Transport would stop, stocks would collapse. And it wouldn't take long until the US army couldn't move for lack of fuel.

Then if China used its reserves and started buying US assets; say company shares, for next to nothing......Oil companies, mining companies, airlines, pharmas , computer & software companies. Maybe even defence contractors and military companies?

Hmmmm. Don't you guys feel just a little bit vulnerable?

Greg T. Jeffers said...

Donal:

Not all to that scenario.

westexas said...

Mexico's net oil exports have dropped by about 50% in only five years, from 2004 to 2009.

EIA net export chart for Mexico:

http://tonto.eia.doe.gov/country/img/charts_png/MX_petnet_img.png

Greg T. Jeffers said...

Mexico would be better off not producing as much as possible... but there is no substitute for Cantarell... and that field has NOT been mismanaged.

Crybaby said...

Donal: The Chinese need the US and their dollars as much as the US needs China. They have an export driven economy run by cheap labor based on a currency pegged to be one sixth the value of the US dollar. Even a slight change in this exchange rate would collapse the Chinese growth rate, send millions of migrant workers back to the farms, and result in instabity which would make Tianaman Square seem like a day in the park. Everyone has this image of China being the superpower controlling the US currency, but what they really want is the technology. That's what the peg is largely about. They want to force American and European countries to open plants in China and transfer their technology secrets there.

But nothing puts more fear in the heart of a Communist party leader than the thought of another widescale peasant uprising - and China is a powder keg of dynamite waiting to explode. The last thing they are about to do is upset the apple cart.

Dan said...

Donal ,

The US is in the driver’s seat regarding china. The US can and is issuing dollars at will and china has no choice but to choke on them or decouple from the dollar. Moreover, If the value of the dollar goes to zero so does the value of their FX reserves. On the other hand If they decouple who buys their junk? Europe? With the US on the sidelines do they couple with the Euro to try to prop up their mercantilist economy? Even if they don’t overtly couple with the euro, with the US on the sidelines Europe is their sole market. Unlike our politicians Merkel is not dumber than a box of rocks; it would go over like a lead balloon. Finally, if they do go for overt economic warfare, world trade breaks down and nobody looses more than mercantilist exporters. Just as no business can survive without customers, neither can a mercantilist exporter that produces but does not consume. The blue collar in the US would do very well however because while we have all kinds of junk we don’t need, we don’t have much of the things we do need nor do we currently make them and if we are not importing them...

Donal Lang said...

Crybaby and Dan; you miss my point. No economic warfare. All it takes is China to tweak your chain (just be RELUCTANT to buy one month!)and the US debt/bond market collapses in disarray.

I'd also point out that Europe has approximate trade balance with China.

As for the US being in the driving seat, China will only take dollars if they are worth something. I'd say its quickly getting to the point where its the Chinese currency tie and the Chinese economic power (and its dollar reserves) which is holding the dollar UP!

K said...

I think getting a kid a slingshot would be more useful than a tennis racket.

Dan said...

Donal,
What I’m saying is China is in a catch 22 and irrelevant. The Fed is monetizing the debt and doesn’t need anyone else, at least for now. Nevertheless, China must buy them to maintain the currency peg. If they stop then the rembi goes parabolic choking off their exports and causing their economy to crash. Once they go down their real estate issues and overinvestment in factories ensures that they stay down.

On the other hand, by keeping the peg to the dollar they are also forcing the price of commodities to rise and in this market the only costs that can be pushed onto consumers is the FEW essentials (Food Energy and Water.) However, since they have much lower incomes the pain will be much more severe and they fall off the turnip truck first. Either way China is screwed.

bureaucrat said...

10-year yield rising back up to 3.32% today. Much more interesting than oil these days. :) Much more likely to sink the country. Keep an eye out ...

Dan said...

Donal,
Put another way, China’s economic power is entirely dependent on exporting cheap junk to the US. What is a business without customers?

Anonymous said...

Dan,

Are you from Western PA? You write like it.

Regards

Coal GUy

Dan said...

Oklahoma. Similar genius loci but different accents.

bureaucrat said...

88.3 million barrels of worldwide demand in 3rd quarter of 2010 ...

"NEW YORK (CNNMoney.com) -- Worldwide oil demand hit its highest level ever on the back of explosive growth in the developing world, according to preliminary figures in a recent report.

But the world's thirst for the hot commodity is unlikely to lead to the price spike witnessed in 2008 -- largely due to oil field investments made during the last bubble, analysts say.

Globally, oil demand hit 88.3 million barrels a day in the third quarter of 2010, according to preliminary numbers released earlier this week from energy consultants Wood Mackenzie. That tops the previous quarterly record of 88 million barrels a day, reached in the fourth quarter of 2007.

The developing world led the rebound, according to the report, with gasoline demand rising 8% in China and 11% in India."

Crybaby said...

The most important fundamental driver for oil demand is economic growth, and growth in the three largest economies in the world, the US, the EU and China is likely to slow in 2011. The European economies have imposed strict austerity budgets which are going to slow growth to painful levels going forward. Austerity means hard times ahead. it means consumers have much less money to spend, businesses cannot expand, and governments make big cutbacks in social spending. The EU is actually the world's largest economy at #13.7 trillion, and these people are not going to be buying new gas guzzling cars in 2011. If anything, they will be selling their cars for food.
The US will have a growth rate of 2 to 2.5% in 2011 by the most optimistic projections, and it might be even slower than that with high unemployment. American consumers are being forced to cut back on everything. And as far as China is concerned, the government is taking very aggressive steps to slow economic growth before inflation spirals completely out of control. Look for an interest rate hike maybe in the next few days and then a series of hikes and bank reserve requirements in 2001.So 2011 is not going to be a robust year for growth.

Stephen B. said...

From Stuart Staniford's blog:

New High of Liquid Fuel Production

Both the IEA and OPEC are out with their new monthly reports today. And both report that oil production in November 2010 exceeded the previous high month of July 2008 (back when oil was $140). Probably the difference is within the margin of error, and in any case the third agency (the EIA) won't weigh in for a few months. At the moment, the average index looks like pretty much a statistical tie

http://earlywarn.blogspot.com/2010/12/new-high-of-liquid-fuel-production.html

So.....we have a little more time until...

westexas said...

From the CNN item:

"But the world's thirst for the hot commodity is unlikely to lead to the price spike witnessed in 2008 -- largely due to oil field investments made during the last bubble, analysts say."

Of course, there is the lingering problem that global annualized crude oil production has not exceeded the 2005 rate for four years and for 2010 to date.

And when we plug in increasing consumption in the oil exporting countries + Chindia's demand, we are looking at a steady decline in the amount of net exported oil supplies available to non-Chinida oil importing countries.