Statistics don't lie, People do

There are some serious benefits to Obsessive/Compulsive Disorder. I never get bored reading the myriad reports coming out of the U.S. Department of Energy.

Take this report for example. I dare you to read it. After you get through the verbage you will come to "Table 1". Notice line item "Other Liquids New Supply". That is the ETHANOL component.

Now let us go back to paragraph 4 in the report:

"Total products supplied over the last four-week period has averaged nearly 20.7 million barrels per day, up by 0.5 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, up by 0.4 percent from the same period last year. Distillate fuel demand has averaged about 4.3 million barrels per day over the last four weeks, up 0.7 percent from the same period last year. Jet fuel demand is 4.2 percent lower over the last four weeks compared to the same four-week period last year."

The report claims that "Total products supplied... (were) up by0.5 percent compared to the similiar period last year. Hmmmm..... Ethanol supply was 352,000 barrels per day, total supply 20.7mm, ethanol made up 1.7% of total products (up from a negative number the year before, whatever that heck that means), it follows that TOTAL PETROLEUM SUPPLIES fell 1.2% for the same 4 week period, 2008 over 2007. The 1st quarter of 2008's petroleum supy actually fell by more... (Stay with me, don't let your eyes glaze over just yet... if you want to make money trading in the markets you gotta do your research. You gotta listen to what "they" aren't telling you. After all, EVERYBODY can hear what "they" are trying to convince you of.) Ethanol contains about 66% of the BTU's of gasoline per unit of volume... so even if you count the ethanol increase the TOTAL BTU AVAILABILITY has not increased year over year, BUT YOU HAVE CAUSED FOOD PRICES AND NATURAL GAS PRICES (Natural Gas is the primary energy input for producing corn ethanol) TO SKYROCKET .

Who thought that one up? Wow! Let me stand back in awe! What a beautiful mind! NOT! (Well, except for the crazy part).

The data supports the Export Land Model contention of Jeffrey Brown, and kudo's to Dr. Tad Patzek of Cal Berkley, Physics. His excellant paper: "Thermodynamics of the Corn-Ethanol Biofuel Cycle" was met with derision when it was published in 2006. Now it would seem Dr. Patzek has not only been fully vindicated, but that we have wasted presious time and resources - sort of like convicting the wrong man (Dallas P.D., are you listening?), you harm an innocent soul unconscienably, and you let the bad guy go free to harm another innocent soul. Way to go, guys!!

The market is going to figure this out eventually, probably fairly soon.


Yours for a better world,


Mentatt (at) yahoo (d0t) com

"Whenever you find yourself on the side of the Majority, it is time to pause and reflect" - Mark Twain

It seems I have some high status company in my vision of much higher oil prices.

OPEC's president is warning of $200 per barrel oil. OPEC is not in the "happy" business. OPEC is a stone cold political operation and they are now laying the blame of future $200 per barrel oil at someone else's feet, namely the folks who let the U.S. $ collapse.

T. Boone Pickens, who was an oil Bear recently (his prediction of falling Natural Gas and Oil late last year and early this year led several potential partners for my hedge fund to take a pass. "After all, Greg, Boone is a BILLIONAIRE, he must be smarter than you every time, all the time". Too bad. They missed the best trade of my career) but has recently come around to the prospect of higher oil prices, perhaps as high as $150 by year end.

So, remembering the wisdom of Mark Twain's famous quip, what am I doing now? My usual: I worry (and I have a full head of grey hair to show for it). But I am not going to do much at the moment. Oil prices could certainly come in, and I will miss the trade. I am leveraged to the gills, so any correction might cause me to lose the last few black hairs I have left. Still, despite the new found company of brand-name big hitters, I remain long and (hopefully) strong.

Not enough folks have stopped calling it a "top" for it to be one.


Yours for a better world,


Mentatt (at) yahoo (d0t) com

"The New Politics of Hunger"

This was the lead article on the front page of MSNBC today.  

Look, you know I have been ranting and raving about "food and energy", "food and energy", "food and energy" (G-d help me, I sound like a tin hat economist with their "supply and demand" mantra")...  but give that article a close read. Beyond the obvious, there are some serious implications for world TRADE in the middle of all of this, not least of which the value of the U.S. $.

If the U.S. continues its ethanol mandates it is very likely that the country will no longer be a corn exporter sometime between 2010 and 2012.  On the other hand, if the U.S. does not continue its ethanol program the country will not have enough transportation fuel (Please!  I am well aware that ethanol is probably not even energy positive, or slightly so.  I am talking transportation fuel - I will get to how Natural Gas fits in all of this shortly).  Now that's a conundrum!!

But wait! It gets better... U.S. Natural Gas ("NG") inventories are at their lowest in terms of "days of supply" in at least 6 years, hence the recent run up in the price of NG.  However, said recent run up in price leaves U.S. domestic NG prices at about 60% of what Japan is paying for Liquified Natural Gas ("LNG") imports.  At some point in the next year or 2, baring a MIRACLE, the U.S. will have to compete in the market place for those LNG tankers to deliver their cargo HERE, in the U.S.  

So let me ask you a couple of questions:

Does any rational person think that those LNG tankers are going to show up here unless we out bid the other guy?  And isn't the price of NG in the U.S. going to be set by the MARGINAL supply?  Wouldn't you define the LNG tankers product as the MARGINAL supply?  Won't the addition of another wealthy bidder (the U.S.) in the world LNG market increase the price of LNG (all else being equal)?  Won't this raise LNG, and hence NG prices in ALL importing nations (again, relative to market conditions as then exist absent the new U.S. participation in the LNG market)?

Now let us connect a few dots, shall we?

We have rice and grain shortages the world over, some of it spreading to wealthy nations like the U.S.

T0 grow rice, corn, wheat, and soy beans at the quantity we have become accustomed to (now I sound like a divorce lawyer), farmer's need fertilizer.

Natural Gas is the primary feedstock in the manufacture of fertilizer, and Natural Gas prices have risen substantially since the Northern Hemisphere's LAST GROWING SEASON.  So the recent price increases DO NOT REFLECT the recent hike in production costs for food.  Not to muck this up with too much data, but diesel prices and pesticides (made from oil) have increased by over 50% since the last growing season

I have laid out the case as to why NG prices, and hence fertilizer prices, could move much, much higher, and I have already tied much higher fertilizer prices into higher food prices, and perhaps LESS FOOD.

Of all the grains CORN requires the most nitrogen fertilizer (ammonium nitrate), and the U.S. is the LARGEST PRODUCER AND EXPORTER OF CORN in the world (forget the dubious moniker "The Saudi Arabia of Coal", the U.S. is certainly "The Saudi Arabia of Corn").  However, as I stated earlier, the U.S. is expected to consume all of the corn it now exports to make ethanol.

28 million Americans are already on some form of governmental food assistance program.

The current rice shortage is small potatoes (no pun intended) compared to what's to come as NG, fertilizer, and diesel prices move higher, and the corn normally exported to other nations by the U.S. is consumed in its domestic ethanol production program.  Of course, the nations that sell us our fertilizer might not be happy about getting U.S. $ for their valuable product rather than food to feed their people, so there might be a couple of kinks that need to be worked out of the trade model I am suggesting...  at which point the U.S. might cut back on its ethanol production and trip over a lack of liquid transportation fuels driving up the price of oil and further increasing the trade deficit... and speaking of the Trade Deficit, just where is the money going to come from to purchase that LNG we will be needing?... and won't all of that continue the pressure on the U.S.$ which will cause Oil and LNG import prices to increase in $ terms, and won't those prices increase put further pressure on the $, repeat ad nasseum... a  person could go nuts thinking about this...

Uh-oh... too late,

Yours for a better (their taking me away, haha!) world,

Mentatt (at) yahoo (d0t) com

My Contra Indicators are in the Red Zone Again

One of my best contra-indicators (a contra indicator is an indicator that is either usually wrong or whose presence indicates immanent disaster in a particular market) just made me think that a run to over $150 per barrel for oil is likely by year end.

My contra-indicator, actually there are 2 of them, are a couple of Wall Street salesmen.  They don't know each other.  I am the "first degree of separation" for them.  I had a short conversation with one several weeks ago and the other last week - and here comes the contra indicator:

They both said they didn't think Oil would go to $150 per barrel.  Not this year, not 2009, not 2010.

I asked them how they came to that conclusion.  Here comes the good part:

"I, I, I... I just don't THINK so.  I just don't THINK so" (emphasis added)

Now, I know for a medical fact that both of these individuals are congenitally incapable of any form of abstract thought, and have been since the day they passed their test for a securities license.  Self made millionaires both, But not because they did any original research.

These guys have been wrong on oil for several years now, so I know I should be concerned that eventually, like a broken clock, they will be on the right side of the trade.  There is no perfect indicator, contra or otherwise.

Still, I actually DO think.  and...

for the December '08 WTI contract:

50% probability the contract trades for $150 to $200 before expiration;

30% probability the contract trades trades $100 to $150 before expiration;

20% probability the contract trades under $100 before expiration

And because I will continue to, you know, actually think... I reserve the right to change my mind on a moment's notice.

Yours for a better world,

Mentatt (at) yahoo (dot) com

This is what the beginning of FOOD SHORTAGES would look like

Reports have come in from all over the world, the web, CNN, CNBC. MSNBC on rationing of large food staples such as rice, wheat, and cooking oil at Costco, Sam's Club, and Walmart thoughout the United States.

The U.S. will not be experiencing "food riots" anytime soon (unless we engage Iran militarily, at which point I would not count on those diesel "warehouses on wheels" showing up at your local grocery store... there are events that would prove me wrong but which, I believe, are highly unlikely. I hope those are not "famous last words"...), but let me ask you a question:

What else would the BEGINNING of food shortages look like? (I wouldn't envision Darth Vader running through the parking lots of gorcery stores impaling folks and making off with their bags of cheeze doodles...) What did the beginning of the U.S. energy shortage look like? (Don't think we have an energy shortgage? Ha! We have a significant shortage of $1.50 gasoline...) Let's look back all of 4 years:

Oil broke $40 per barrel in early 2004, and the oil companies and Wall Street and the U.S. Department of Energy all told the public "not to worry", things would be back to normal soon. At $50 per barrel oil was declared to be in a bubble. At $60 per barrel, "remain calm", Hydrogen technology will save us (seen any Hydrogen around lately?). At $75 the U.S instituted the ethanol mandates, which had the undesirable unintended consequnce of significantly contributing to food price inflation. At $100, the public STARTED to hear talk of how there is plently of oil, but we are running out of CHEAP oil. At $120, the media, Big Oil, and Government broke out the "Bubble of all Bubbles" propaganda... which is where we are today.

Now oil is something we can conserve, something we CAN get by with less of. What about food? Can we "conserve" food? Be "Green" on food? Ration food?

Let me ask you another question:

Should we/you risk it? What if "they" are as wrong about food as "they" were about oil?

Just go to Google. Type in "World grain Invenories 2008". READ. ANY QUESTIONS?

Now calculate the effects of 75 million more folks showing up on spaceship Earth each and every year, a new United States every 4 years, and explain to me where the energy and food is going to come from to feed, and warm, transport them all? BTW, care to explain how 4.5% of the world's popualtion (the U.S.) is going to continue to consume 25% of the world's energy? Forget justifying it, just tell me how the U.S. could POSSIBLY enforce it. NAFC (That's a technical term used in many E.R.'s for patients that ain't gonna make it... Not A F%#$!! Chance).

Everything from the drop off line at little jimmy's school to trips to Disney World are going to come to a screeching halt SOMETIME in the next several years (want to buy some swampland in Florida near Disney?).

Speaking of Florida... or any other hurricane vulnerable area... Take a good look at the file footage from New Orleans and Katrina. Now mix in a shortgage of diesel fuel and gasoline, a housing crisis, a recession, and a hurricane... shake vigorously... and out comes a 4 million person refugee camp, in the Florida heat, no less.

BTW, have a nice day!

Yours for better (slimmer, trimmer you!) world,

Mentatt (at) yahoo.com

The Silence is Deafening

Over the past 4 or so years I have communicated my position on U.S. oil supplies, oil imports, and the U.S.$ to my brethren on Wall Street.  I have traded email barbs with good humor.  Now, with oil prices substantially over the $100 mark, I find the silence DEAFENING.

Allow me to shed a little light on Wall Street.

Folks who make a living in the U.S. financial markets are TERRIFIED of the energy issue, and so MUST DENY IT.  Their commissions and fees DEPEND energy prices declining, and doing so before the reason they do decline is the lack of supply decimating the economy and hence their demand.  This is the FINAL game of musical chairs for this generation of market participants.  

Reality does not give a good fart about what you perceive, what you want, what you hope, what is convenient.  "Faith" should be confined to the things nobody really believes in.  

Life has been, and always will be, a competition for survival and primacy (argue the point if you like, but those who do will likely not be the folks who pass on their genes, evolutionary dead ends).  The energy condition will continue to present opportunities, though the opportunities presented might not be what you originally wished for.  Well, that's just too bad.  When I was a kid, I wanted to be like my hero, Bobby Mercer, the Yankees' center fielder.  Problem was, I couldn't hit a beach ball with a bat.  I still got an athletic scholarship to a major university (I was just a journeyman but I had fun) , but it sure wasn't in baseball.  Sometimes you have got to make adjustments.  Bobby Mercer or Micky Mantle (I know I am dating myself here) aside, most of us have to make a continuing series of adjustments in order to succeed.  That is where businessmen and investors are right now - at the cusp of an important decision to make of one of those life altering adjustments.

I doubt this is THE BIG ONE.  Oil prices will give and take up and down on their way higher - but the writing is on the wall, so to speak.  All of the B.S. Wall Street is feeding 45 year old businessmen about "Retirement"!!  What a laugh!!  By the time this age group arrives at the age where they might need their money the U.S. currency will have devalued another 75% to 90% from here!!  Maybe people are not so dumb.  Maybe THAT is why we have a zero savings rate.   

But if you are reading this blog you are probably not among the Zero assets crowd.  So here is my advice:

1.  Spend everything you have on all things you ever wanted to do.

or 

2. Convert most of your financial assets into hard assets.

or 

3. Some combination of the 2.

Mentatt (at) yahoo (dot) com

The $ Plumbs New Low

Even a U.S. Dollar "Bear" like me thought that the dollar would get some relief.  Perhaps it is not to be.

Crude oil prices are soaring.  Higher oil puts pressure on the $ with its concomitant increase in the US Trade Deficit, as the $ falls it pressures oil prices higher in $ terms, which, in turn, puts further pressure on the $...

I thought the ECB would have cut in the next 90 days or so, supporting the $.  Perhaps I am wrong, and the Europeans have decided that they would rather be able to buy oil than sell chachka's to the US.  

Menatt (at) yahoo (d0t) com