Monday, February 21, 2011

Muammar Gadhafi, exit stage Left...

3 Arab dictators in 2 months?  Seems darn likely. I doubt Gadhafi survives until the weekend if it proves true that he has used foreign mercenaries against his people and members of his officer corps have defected to Malta.

Front month Oil is up $8, and December 2012 is up over $5 to $102.50. I could be wrong but it would seem that we are back in that 2008 time warp...

The shorts on the commodities side are getting murdered... blood is everywhere.  10 year Treasuries are up 12 ticks, most of that is the US$.

The backwardation in Corn is pretty bad... whatever is up with crop prices, the market seems to expect a steep decline over the next 21 months - Front month corn is $7.15 and Dec '12 corn is $5.40.

Makes your head hurt.

Read this article on food supplies, harvests, and inventories... read the last paragraph twice. Maybe three times.  This is "a mystery, wrapped in a riddle, inside and enigma...."

Back to the convulsions in the MENA

There is simply no containing this thing. Saudi Arabia, Algeria, Iran... the train left the station, not sure of the arrival time....

An Oil shock can come at any time... but the odds of us getting one before the end of next year is pretty good.

10 comments:

Donal Lang said...

To do a complete analysis on the relationship between oil and crop prices would be complex - you'd need to take account of the price point of the fuel as it hit each market, not just for tractor and transport fuel, but also when it went into fertiliser or pesticide production, or crop drying. I can't imagine anyone goes that far.

But I'd also assume that, depending on the crop cycle and timing, a high fuel price will have a time delay of 12 to 18 months before it translates into higher food prices. In other words, we're now getting the price hike from 2008, and it'll be next year that current rising fuel prices hit the food market again.

As for the M.E. situation; Egypt is important as a grain importer and Libya is important as an oil producer, but the BIG one is Bahrain, and Saudi must be doing everything in its power to stabilise the Bahraini administration. If that goes down, Saudi will almost certainly follow, and then we'll see what Peak Oil really means for prices of oil and food.

Any bets on $200 a barrel by the end of the year?

Greg T. Jeffers said...

Donal:

I think you are quite right about Bahrain.

But the backwardation in the corn market is brutally steep - ergo, it is not Bernake's money printing or "climate change", because if it were either or both of those things the market would be in contango (prices for later delivery would be much higher NOT much lower).

Not that markets always price things correctly... but this is pretty significant.

westexas said...

Egypt, a classic case of rapid net-export decline and a look at global net exports:

http://www.energybulletin.net/stories/2011-02-21/egypt-classic-case-rapid-net-export-decline-and-look-global-net-exports

Consider the first 15 minutes after the Titanic hit the iceberg versus the last 15 minutes before the ship sank. In the first 15 minutes, only a handful of people knew that ship would sink, but that did not mean that the ship was not sinking. In the last 15 minutes, it was readily apparent to everyone that the ship was sinking, but by then it was far too late to try to get to a lifeboat.

Anonymous said...

Export decline will be harder on the Middle East exporters than on us. They don't have much arable land and huge population growth. With no oil money...

If thing go badly, some idiot group or another will teach the West a lesson and destroy lots of oil fields.

Regards,

Coal Guy

westexas said...

At least in one I call Phase One Net Export declines, the cash flow from export sales will be stable to increasing, even as volumes fall, because of generally rising oil prices.

In Phase Two, generally rising oil prices can't offset the declines in volumes.

Anonymous said...

Westexas,

I agree in the aggregate, but as each country approaches zero, things will get bad rapidly. Egypt went from net exporter to net importer. Price increases can't help unless demand inside Egypt is depressed to the point that they become an exporter again. If the increased revenue is offset by increasing cost of food, it won't help much either. It is a nasty trend.

Fortunately for now, NG ( and therefore ammonia ) is decoupled from the price of oil. I expect that the enormous price difference will drive gas to oil conversion and NG will rise. $24 BOE gas will not last alongside $106/bbl oil indefinitely.


Regards,

Coal Guy

Charles said...

There's another point here, already visible in Libya. When the shit hits the fan, Westerners pack up and go home and production at least reduces and perhaps stops altogether.

If this swathe of unrest continues, even if Saudi hangs on to its government (increasingly unlikely) then the whole idea of Westerners living and working in the M.E., or of oil goung through the Suez Canal, becomes harder to contemplate. How much has Libyan production suffered already?

Add to that, its only a matter of time before the various Islamist extremist groups start getting their act together, either to create new governments or to create mayhem. These might be a popular uprisings now, but tomorrow......?

I'll stop now; I'm getting mtself depressed!

Anonymous said...

Orlov likes to say that the American Empire will collapse much like the Soviet Empire collapsed. He has repeatedly stated that the ME are our Eastern Europe and when our guys (dictators that are pro US) start getting kicked out its only a matter of time.

I wonder how Iraq will play into all of this as its the only US friendly oil producer in that part of the world that isn't run by a dictator(s).

ChrisInGa

Anonymous said...

My understanding is that the Saudi government is doing a serious rethink of it's own internal and external security arrangements particularly in regard to the US.

Why?

Because they have just watched the US throw several fellow autocrats under the bus in the face of popular uprisings. In the case of Mubaruk, SA tried to seriously intervene but was unable to influence US actions- a public humiliation in itself.

The Saudis have a similar relationship with the US. They keep the oil shipping, buy US Treasuries, and cooperate in US Israeli policy. In return the US guarantees the security of the Saudi Monarchy. Of course, the demonstrated unreliability of the US security guarantee is in the forefront of their long-term thinking.

So the Saudis are stuck with an unreliable security partner, a mountain of risky USTs, and a system of global oil payments based on the scary US Dollar. And they don't appear to be happy.

Several possibilities are ahead-

1.Dropping oil sales in USD and switch to Euro, Yuan, Yen.

2.Oil embargo or UST selloff to force US hand in Israeli Palestine situation.

3.Accelerated development of Saudi relationships with East Asian nations- maybe including Chinese or Russian security partnerships. More oil heading east?

4.A refiring up of the Gulf gold backed regional currency which was put on ice under Saudi pressure.

5.Slow or fast selloff of UST holdings- as the USD is slowly losing value against gold and the stronger currencies.

6. And of course the entire ME exploding into chaos with the price of oil going up, up, up.

Best, Marshall

Anonymous said...

Marshall,

I think that the policy shift started with the GWB administration. The Saudis and the rest were pushed very hard to implement reforms. I don't think they will be around long enough to renegotiate with the US or anyone else. Their successors, on the other hand may be very anti West.

I heard that the Saudis were net debtors, having borrowed hundreds of billions against oil in the ground. Is this true?

Regards,

Coal Guy