Crude Oil above $92
Oil briefly broke over $92 this morning.
In real terms, Crude remains below its all-time
inflation-adjusted high of $101.70 from April 1980. However, Crude has climbed 47.3%
over the past 52 weeks, and since 2001, it is up ~511 411%, from $18 to $92, or an annualized inflation rate of 31.24%. (So much for the transitory, self-limiting nature of these price increases).
Its time again to have a quick look at how and why it got here. It doesn't take a genius to identify several obvious factors:
1. Increasing Global Demand: Booming growth in China and along the Pacific rim is only the beginning of the global story. India, Korea, Russia, Brazil, and Australia are expanding. Even "old Europe" has experienced a spurt in growth. This may be an old story, but it has yet to fully run its course.
2. Falling U.S. Dollar: The dollar is at 15 year lows versus a basket of currencies. Blame the Federal Reserve for failing to protect the currency, and forcing capital to go where its treated better.
>
US DOLLAR INDEX
Fun thought of the day: Imagine if every time Treasury Secretary Hank Paulson said "We have a strong dollar policy" -- and the dollar dropped yet further, his nose grew another inch, Pinocchio-style. I originally was going to suggest a college drinking game where you do a shot each time, but I wouldn't want all those alcohol-related deaths on my conscience.
3. Wars in Iraq, Afghanistan: Its why I flipped bullish on Crude way back in 2002. The two hot wars in the Middle East have increased tensions, reduced Iraq's oil output, and generally led to higher terror premiums for Crude Oil. Future administrations should take note of this simple formula: Mid-East War = Higher Crude Prices.
4. Supply constraints: US crude oil stocks unexpectedly fell by 5.3 million barrels last week, and we have a variety of infra-structure issues contributing to this factor. Globally, there is a tight supply of ships, refineries, pipelines, and storage facilities. This contributes to a minimum amount of reserve -- no buffer -- which means Crude Oil Futures fluctuate even more than they might otherwise.
5. Saber-rattling against Iran: The increased jaw-boning against Tehran in general and the Revolutionary Guard in particular. A variety of analysts have noted that threats of US sanctions against Iran and tension on the Iraqi border had also helped fuel the oil rally.
Although I am not a fan of this White House, I guess I owe them a debt of gratitude: Their tone deaf saber rattling is definitely helping my positions in energy stocks and commodities.
Who ever would have guessed that actions have repercussions?
There's plenty of pixels being spilled on the subject; here's a typical excerpt:
"Oil futures rallied to a new record high on Friday, with worries about U.S. inventories and Middle Eastern tensions combining to send the benchmark energy contract past $92 a barrel.
Crude for December delivery rose as high as $92.22 a barrel in electronic trading, a day after the U.S. slapped new economic sanctions on Iran. The gains were also driven by worries about potential conflict between Turkey and the Kurds in the north of Iraq.At 5:30 a.m. Eastern, crude had settled back a bit. It was up 82 cents to $91.28 a barrel.
Oil prices have been lifted by data, released Wednesday, showing a much higher-than-expected decline of 5.3 million barrels in crude supplies. Some believe the $100 a-barrel level is just around the corner."An unexpected drop in U.S. stockpiles has added to ongoing concern that supply from the Middle East may be disrupted," said analysts from Saxo Bank in Copenhagen on Friday.
Gold futures also rose to a 28-year high on Friday. Commodities across the board are getting a lift from expectations that further U.S. interest rate cuts could come as early as next week, and could fuel inflation."
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Hey, at least the core is contained . . . $100 Oil, here we come!
>
Sources:
Supply fears push oil above $92
BBC, Friday, 26 October 2007, 07:01 GMT 08:01 UK
http://news.bbc.co.uk/1/hi/business/7063250.stm
Crude rallies past $92 to new record
MarketWatchLast Update: 5:50 AM ET Oct 26, 2007
http://tinyurl.com/2w46gd
U.S. slaps new sanctions on Iran
Sue Pleming
Reuters, Fri Oct 26, 2007 6:58am BST
http://uk.reuters.com/article/topNews/idUKN2542594620071026
Crude Hits $92 on Supply Fears
By YEE KAI PIN
October 26, 2007 4:56 a.m.
http://online.wsj.com/article/SB119338625862872747.html
Friday, October 26, 2007 | 06:21 AM | Permalink
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Trends: Oil is up 511% since 2001, and the dollar hits a 15 year low. People who keep their savings in low-interest savings accounts cannot be happy, if they see what is happening. Link: The Big Picture | Crude Oil above $92. Crude remains below its al... [Read More]
Tracked on Oct 26, 2007 8:16:18 AM
Comments
Moin from Germany,
Jeff Matthews sums it up
OPEC to Fed: “Go Ahead, Make My Day”
Posted by: jmf | Oct 26, 2007 7:35:41 AM
If the market does not trade lower today, then it never will. $92 oil...
BTW, I noticed, really noticed, how much prices have gone up in the grocery store lately. When I went shopping this week I thought I was in the twilight zone. I don't see how Joe Average is making ends meet.
Posted by: LAWMAN | Oct 26, 2007 7:45:23 AM
Moin Lawman,
you need to go to the CPI Cafe
:-)
Posted by: jmf | Oct 26, 2007 8:12:54 AM
There is an increase in read demand as noted in (1) but don't forget that there is a ton of speculative demand which shouldn't be forgotten.
On the flip-side, supply constraints are one issue but a report just came stating that we may have already reached peak oil production in 2006 from current oil fields. Unless we're on the verge of rapid technology improvements for getting at the harder-to-get oil, oil production will continue to decline in the face or rising demand.
I would speculate that one of the reasons that OPEC isn't increasing production quotas is that they can't! All of the easy stuff has been skimmed and increasing production would require a massive capital injection.
Posted by: W.Edwards | Oct 26, 2007 8:21:55 AM
We should discuss the reasons for the disparity between gasoline and crude---
On Sept. 19, 2005 gasoline averaged $2.78 a gallon - crude oil was "only" $67.39/barrel
On April 17, 2006 gasoline also was $2.78 a gallon - and crude oil was at $70.40/barrel
This past April 2007 gasoline was selling for $2.80 a gallon - and crude was at $61.51/barrel
And , last week , the average price of unleaded gasoline was a little over $2.76 a gallon. That was when the price of crude oil was selling at $86.13/barrel
Posted by: jj | Oct 26, 2007 8:31:34 AM
BR
I gather that you believe the underlying inflation rate is running above 2.0% to 2.5%. If so, why are fixed income investors (who may be smarter than equity investors)willing to accept only a 4.3% nominal return for the next ten years? Is it fair to say that you believe the drop in yields from 5.2% to 4.3% is a mis-pricing by fixed income investors? thx.
Posted by: dan | Oct 26, 2007 8:33:20 AM
that's retail gas not wholesale
Posted by: jj | Oct 26, 2007 8:33:53 AM
Hi Barry, Forget about oil. Everything is rosey. Countrywide just announced a 1.2 billion dollar loss but the future looks great!
Posted by: David Price | Oct 26, 2007 9:16:37 AM
I was just going to ask the same question -
why the disconnect between unleaded gasoline and crude prices? Price has been relatively stable for quite a while, what gives??
Posted by: sccofer | Oct 26, 2007 9:17:04 AM
my, what excitement will be engendered when the media begins to discuss peak oil with the same candor that climate change is beginning to experience. here's another plug for the discussions at www.theoildrum.com.
Posted by: ferd mertz | Oct 26, 2007 9:21:30 AM
Barry, don't think it's any coincidence that your "engergy stocks" are going up thanks to this administration's policies. If you really want to be of service to your readers, start reporting on Hilary Clinton's social circles and what stocks they all own.
Posted by: Adam | Oct 26, 2007 9:21:58 AM
"We should discuss the reasons for the disparity between gasoline and crude---"
Obviously, our noble political leaders have forced niceness and goodness upon the oil monopolists.
Posted by: The Dirty Mac | Oct 26, 2007 9:29:04 AM
Notice how many of your driving forces behind the 2001-2007 oil price run are government related?
It is no coincidence since the CEO of Arbusto took office in 2001. Also not a coincidence that his vice-president was the CEO of Halliburton. Halliburton's stock has soared along with oil prices.
Bush bought a large chunk of land in South America and Halliburton is offshoring to Dubai. Why live like a Puritan in America where there is at least a remnant of a middle class when you can go live with your buddies in unchallenged despotisms? The only thing better would be convert America into a despotism... that would be called "hedging your bets".
Posted by: Paul Jones | Oct 26, 2007 9:32:52 AM
The oil-gas disparity has to do with gas demand; Oil goes into many other products. But, it will catch up.
My bet is America's big Xmas present this year will be "5 gallons of gas" and not an Ipod.
It could take 3 months for wall street to figure it out.
Now, if only we could weaken this dollar somemore maybe we can get the dow to 16000.
Can the dow be counted in the CPI?
And I could be wrong.
Posted by: Eric Davis | Oct 26, 2007 9:55:22 AM
"Notice how many of your driving forces behind the 2001-2007 oil price run are government related?"
Most or all.
But, personally I think that for the administration to have somehow engineered higher oil prices there would have to be an amazingly high level of competence and effectiveness. I think that such a theory vastly overrates Bush et. al.
Posted by: The Dirty Mac | Oct 26, 2007 10:05:19 AM
Forgot who it was on CNBC's Fast Money last night that was saying oil supply is NOT a problem, and that this move in crude is momentum driven by speculative traders. He said that his company is getting calls from oil companies trying to unload crude that he is not used to.
His opinion was that fair market valuations for crude should be around 60/barrel; the rest is trader driven.
Posted by: UrbanDigs | Oct 26, 2007 10:07:20 AM
How did things get this way?
Politics.
The ineptitude, incompetence, and hubris of the current maladministration of our Federal Government has resulted in trouble on all fronts - social, military, economic, and cultural. Expensive trouble. No matter the lessons of history, the wisdom of true conservative ideology, or ingrained cultural caveats (The Grasshopper and the Ant, or Polonius' instructions to Laertes, for example), the current Executive and his Imperial court have slashed and burned a foolish and dangerous path to national insecurity.
Bush's lack of business accumen was clearly evident prior to his first installment as "America's CEO". Too bad most people don't take due diligence more seriously.
Now we have to take our losses.
Posted by: Marcus Aurelius | Oct 26, 2007 10:21:44 AM
In real terms, Crude remains below its all-time inflation-adjusted high of $101.70 from April 1980.
Now, is that actual inflation, or is it by the fictional inflation ex-inflation numbers you talk about?
Posted by: OkieLawyer | Oct 26, 2007 10:26:11 AM
Well I'm gonna go out and buy a new Suburban anyhow because Reverend Joel says if I just keep a positive outlook everythings gonna be ok!
Posted by: Bob A | Oct 26, 2007 10:30:27 AM
Jimmy Rogers is spot on:
1) Get out of $USD.
2) Get into commodities
Year to date scorecard:
S&P500: +7.75%
DJIA: +10.37%
NASD: +15.57%
Gold: +23.26%
Oil: +53.3%
"What's in your wallet portfolio?"
Posted by: Pool Shark | Oct 26, 2007 10:38:18 AM
OT
Things have returned to some normalcy (I guess since the lead story is where are the chargers going to play-pretty sad)
The issue surrounding the use of the military 0planes NEVER GOT RESOLVED. They (the CAL-FIRE people) still claim it was too dangerous even on Wednesday to fly. How this is possible when news planes and helicopters were allowed is just another example of protecting contracts. Sounds alot like the stock market.
I found a burned piece of pine tree sitting at the base of a large tree in my front yard. This is how most of the houses in my area (rancho bernardo/Poway) were lost. Not a wholesale burning but it was completely random. Most houses located at the tops of a canyon or arroyo had damage or were burned completely. My sympathies to those who lost whatever they had.
Bush came yesterday (about three days too late) and ALL air traffic was stopped so he could take a little tour. Pretty shitty when you consider the work yet to be done.
I gave him the single digit salute as he flew over my house.
MS
Posted by: michael schumacher | Oct 26, 2007 10:47:33 AM
Two words: peak oil... soon to be peak fossil energy.
Read more at http://www.theoildrum.com
Economics, as always, will trail reality and the markets will only work for the rich.
The rest of us (not rich) will be cold, unemployed and probably hungry.
Posted by: Jim K | Oct 26, 2007 10:48:11 AM
"5. Saber-rattling against Iran: The increased jaw-boning against Tehran in general and the Revolutionary Guard in particular."
IMO, the State Departments official classification of the Guard as a terrorist organization goes beyond mere sabre-rattling. Does this action give Bush the legal authority to strike Iran without the consent of Congress?
Posted by: winjr | Oct 26, 2007 10:54:34 AM
We traded up on a 3% loss in Consumer Sentiment... I guess "Heck with the Consumer! Microsoft actually sold some copies of Vista... Nice when a monopoly finally does well."
I need to take a nap, I'm starting to fall into the: "Black Helicopter", "Hyperinflation", "gold bug", "Dow is going to 20,000" crowd. What will it take 3 more rate cuts? and 1.6 dollars to the Euro? Where is that blog?
I jest, but not!
Good news is.....
Posted by: Eric Davis | Oct 26, 2007 11:06:47 AM
I am surprised by some of the comments claiming that the current administration is "incompetent". George Bush may be incompetent, but his inner circle and the cronies they added are/were lethally competent. They got exactly what they wanted. They all became rich and they added socially conservative members to the Supreme Court. To hell with anyone else. 2006 derailed the gravy train slightly, but they're still grasping at a few last straws before '08 ends their reign completely.
Posted by: Adam | Oct 26, 2007 11:07:42 AM
