Crude Oil = $92 $91
The kneejerk reaction to lowered crude is that its a positive for consumers. Under normal circumstances, that is true. But int he current environment, well, not so much.
The drop from $147 to $110 or so was demand destruction, as Americans drove less miles, stayed closer to home, consumed less. It is a classic case of high prices being the cure for high prices.
But the recent acceleration of the price drop in commodities is a reaction to a variety of macro factors. Ike being less bad than expected is certainly part of it, but there's a lot more to it than that. The collapse of Lehman Brothers, the BA/Merrill merger, and AIG's crisis are all huge credit negatives.
They imply further economic dislocation due to a tightening credit availability, and other related problems. In my mind, that's why Oil is selling off -- expectations of further credit dislocation and economic contraction.
Your mileage may vary . . .
>
Crude Oil Almost Down to $92
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Tuesday, September 16, 2008 | 07:01 AM | Permalink
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Still looks like just another popping market bubble to me. The fundamentals never really supported a price over $80 or so, if that.
Posted by: Jacques | Sep 16, 2008 7:07:49 AM
I'm curious as to what effect the big time liquidity injections being made by various Central Banks will have on the price of Gold and Silver, near term?
Posted by: SINGER | Sep 16, 2008 7:11:43 AM
BR, help me do the math: transportation is 10% of the household buget, so you get a $0.65 drop and that is suppose to be an "explosive" shot in the are to the average american? I don't think so.
Posted by: JustinTheSkeptic | Sep 16, 2008 7:15:04 AM
Krugman once suggested that the elasticity of demand for oil was around 0.06 - that is, highly inelastic. Hence, the recent YOY ~100% rise in oil brought about only about 5% demand destruction. This implies that anticipated future demand contraction even of single digits could be similarly magnified into much greater price drops in oil (as we are seeing).
Posted by: Mind | Sep 16, 2008 7:24:48 AM
Actually, no one puts oil in their gas tank. Altho' the proce of oil has dropped, the price of gasoline is well above $4 in most areas due to the hurricane. What is even more interesting is the 15% drop in RBOB prices since Friday's $2.78 close. RBOB is trading @ $2.50 per gallon. Why haven't the consumers seen the savings. Currently, if you add state and federal taxes, the national average for petrol should be $3.15/gallon not $4. Thus, the $4/gallon gas is a continued tax burden on the economy, ragardless of oil prices.
It is even more interesting that in Bush's Laizze Faire economy that when RBOB prices go up, economists argue that it is "a world price", but when futures prices go down and pump prices go up then everyone neglects the "world price" concept. Since the world price is $2.50/gal, should a station be able to buy in the "world" market at the cheapest price?
$$$ Sheik
Posted by: john Doe | Sep 16, 2008 7:25:43 AM
I agree with Jaques. Twas a bubble and it's popping. I had thought it would drop back to 80, but looks like it may overshoot much lower. Nevertheless, I hedged my DUG's yesterday, since it may be getting oversold.
BTW, still no power down here I Houston. less than a quarter restored. Ice and gas hard to come by. Fortunately, weather turned pleasant; in low 60's and breezy this morning.
BTW, I think Entergy's response to Gustave in Louisiana was much more effective. On a per capita basis I think Entergy had 2-3 times as many people in the field. Nothing like a governor kicking the butt of a regulated utility to get action. But, here in Texas, it's freemarketland. News reports are that more workers are arriving -- almost 4 days later?
Posted by: Mike in NOLa | Sep 16, 2008 7:44:35 AM
BR:
Could it also be that various players/speculators are being forced to raise capital and are selling whatever they can that is liquid?
Oil is liquid (no pun intended) and you can still sell a chunk of it and get a very decent price (unlike, say AIG).
Henry
Posted by: Henry | Sep 16, 2008 7:48:19 AM
The kneejerk reaction to lowered crude is that its a positive for consumers. Under normal circumstances, that is true. But int he current environment, well, not so much.
------------------------
People always expect an instant adjustment.
It makes me think of my first boardroom meeting in 1993 when I was penniless, fresh out of school and without a car.
The PMs were looking at the car sales data and scratching their heads... they couldn't understand why car sales weren't picking up considering all the rate cuts.
So naive little me said: "Don't people need a job first?" (Unemployment in Canada was through the roof at the time)
And the 45-50 year old CEO gave me, in front of all the other big shots, a lecture on economics 101.
Today I realize he was a jerk, then I was totally humiliated.
Posted by: D. | Sep 16, 2008 7:54:57 AM
"what effect the big time liquidity injections being made by various Central Banks will have on the price of Gold and Silver"
imo not much - we are becoming less bling oriented - by necessity - and thats bad for better home and garden trinket markets
its a b&b world (a bed & a breakfest)
Posted by: Greg0658 | Sep 16, 2008 7:58:35 AM
Mike I NOLA,
Disagreeing amicably, I've got a target on oil in the mid $70's as a bottoming point. a 50% correction is nothing to sneeze at, and it's not like people have changed their behavior that dramatically.
75-ish, bottoming, back off to the races.
That is, of course, unless deflation takes hold. Then...
Posted by: Byno | Sep 16, 2008 8:00:16 AM
Barry,
do you still believe that all markets are rational all the time? Prices go up, if everybody thinks they are going up. The trend is sustained as long as enough people are buying at higher prices, because they think it is still cheap.
We see it all the time that prices are made by expectetd not actual supply and demand. If enough people start cashing in their profits, prices go down.
Everybody is deleveraging, even in comodities. Cash is king. Many people take their money and leave the one way bet on ever higher comoditiy prices.
Posted by: Gregor Neumann | Sep 16, 2008 8:06:37 AM
Let's see SPR is opened,check MEND declares "war" in Nigerian delta,check Cantarell is in terminal decline . It is still early. 90$ still hurts
Posted by: bullpin | Sep 16, 2008 8:10:51 AM
The gasolilne market is becoming like the precious metals markets.
Paper gold and silver is incredibly cheap, but it is impossible to buy physical gold and silver at those prices.
Paper RBOB gasoline is being sold off ridiculously, but half the refineries in the Houston area are going to be offline for a couple of weeks to a month, and physical gasoline is going to be impossible to buy at paper gasoline prices.
The disconnect between paper and real spot prices is discombobulating.
Posted by: godot10 | Sep 16, 2008 8:13:07 AM
Where are the peak oil folks now? I'm sure.
Hedge against poor equities, period. Now it's a scurry to cover your ass. Seems the talk here is only about the pain at the pump related to gas prices but you forget everything went up..like food??? How fast do you think that will come down?
This mess is about Realtors, mortgage brokers, RE lawyers, builders, banks, Wallstreet, the Bush Administration, Paulson, Greenspan,...all looking the other way while the great housing ponzi scam wound out of control. There were people out there 5 years ago pointing out where this would go. Everybody with any power to do something looked the other way and lined their pockets.
Now we have a broke country with no credit of any sort being brought to it's knees.
"I'm sorry son,...It just started with these Realtors who needed an e-class, big boobs, garden parties, their stomach sucked out, and their lips plumped??
That may be a little one sided and I know it was bigger than that. Our children's future has been sent down the river for a bunch of shit we didn't need!
Posted by: Ken H. | Sep 16, 2008 8:26:39 AM
I agree with Henry. There are a lot of companies that are fundamentally well off and are very good values at this point but they continue to sell off. The raising of capital to sell off assets will reverberate through the markets until there are no more assets to sell.
Posted by: andrzej | Sep 16, 2008 8:27:34 AM
Bloomberg had oil futures @ 89.77
Yet Gold on its way back up (can you say disconnect?)
More support levels to breakthrough in such a (breathless) short time?
The hedges will continue to implode as the desire to seek safety (cash) will overpower any FA/TA.
Fear (and doubt) will always overpower reality. Perhaps that is what drives reality in the human experience. 'Black box' programs not withstanding!
I doubt anyone's mileage will vary on this premise.
Posted by: SR | Sep 16, 2008 8:35:39 AM
henry writes "be that various players/speculators are being forced to raise capital and are selling whatever they can that is liquid"
this is the root cause
To Many People Without a Decent Living
forced (nudged) into 1st or 2nd jobs
what do we do?
Posted by: Greg0658 | Sep 16, 2008 8:37:13 AM
The disconnect between paper and real spot prices is discombobulating.
This reality is a very interesting phenomenon--the disconnect between the 'paper' and physical markets.
It's like one of those: "Who ya gonna believe? Me?, or you're lying eyes?"-type of situations..
A friend of mine owns a Coin Store, she's been telling of the abuse heaped on by 'new' customers when she quotes her sell price( above spot ). She's never seen, in her 40+ years of experience, such an 'artificial'( her words ) market..
This is a pricing phenom. seen throughout this market..
I thought it was an worthwhile anecdote..
Posted by: Mark E Hoffer | Sep 16, 2008 8:37:33 AM
Where are all the peak oil folks now..."
-- Ken H
What does leveraged speculators causing oil prices to run too far too fast have anything to do with most of the world's oil fields plateuing or hitting terminal decline?
Two years from now, tell me that $150/barrel is too expensive.
Posted by: Byno | Sep 16, 2008 8:43:29 AM
There is certainly a bit of speculative unwind, but I agree 100% that the cure for high prices is high prices. Supply and demand, and the market is simply reflecting what the current outlook is for that demand. Not a "good" sign.
Posted by: Mike Castronovo | Sep 16, 2008 8:54:02 AM
If oil traded on supply and demand, prices would have gone from $70 to $50 this year. What we have had is Morgan and Goldman facilitating the buying of futures on huge margins. As oil has come down and Goldman and Morgan need more liquidity, there is less cash to borrow to buy said futures and there have been a ton of margin calls.
I predicted the dollar going down and people asked me how I knew. If you look at the economy, everything was against it happening: Bush, the deficits, the interest rate cuts, the Frannie bailout. I told people it was simple: the dollar was just too darned cheap. When you have homes going for more in Paraguay and Siberia than you have in the nicest Detroit suburbs, you know the dollar is too low.
So those are the two factors causing oil to fall: liquidation of the futures market and a stronger dollar. Contrary to the bullshit Bush's CFTC was spouting, oil's rise was NEVER about supply and demand. Supply this year was up 2 million bpd and demand was up only 0.5.
Posted by: jz | Sep 16, 2008 8:54:19 AM
I am in agreement with Byno . I will be buying domestic drilling stocks soon after things settle down .
Posted by: John | Sep 16, 2008 8:55:46 AM
Take a look at Russia.
Down -16% TODAY alone. Whole market is now halted.
Russia: One of the BRICs Just Bricked
Posted by: TheFinancialNinja | Sep 16, 2008 9:04:32 AM
differently: people are free to have their own opinions about "Peak Oil", though, it's a Ruse.
"How does Oil closer to U$D 50, than U$D 100, play out for the Economy? (yes, read that as under U$D 75)"
Posted by: Mark E Hoffer | Jul 31, 2008 3:38:27 PM
"Peak Oil", and its fellow traveler "GHG-induced AGW", are hoaxes that have little, to nothing, to do with Geo-Physical Scientific reality.
They're Conceits, straight out of the field of work of Bernay's, used as stalking horses, all about Control, with Freedom as their Quarry.
Though, this: "They imply further economic dislocation due to a tightening credit availability, and other related problems. In my mind, that's why Oil is selling off -- expectations of further credit dislocation and economic contraction."
works, by itsef. It's a Credit World, and Credit has been broken.
Posted by: Mark E Hoffer | Sep 16, 2008 9:06:01 AM
"Where are the peak oil folks now? I'm sure."
Who discovered more oil or are you saying demand destruction is permanent and from now on usage in the rest of the world will decline?
Posted by: me | Sep 16, 2008 9:08:01 AM
