Crude Oil = $36.50
By Barry Ritholtz - December 18th, 2008, 6:30PM
In any great organization it is far, far safer to be wrong with the majority than to be right alone. —John Kenneth Galbraith
Macro Notes
US$ rally continuesPeter Boockvar
Asian currencies continue to sell off vs the $ on the heels of the news yesterday that South Korea said they will look into hot money inflows stemming from the $ carry trade and the Bank of Indonesia said they are looking into the foreign buying of bills. This follows the news a few weeks ago that Taiwan was limiting foreign deposit holdings and Brazil was taxing foreign inflow transactions. As I mentioned yesterday, we may have reached a short term pain threshold in terms of $ weakness and foreign countries are fighting back as they certainly won't wait for...
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December 18th, 2008 at 6:53 pm
There is no doubt that a degree of demand destruction has occured, but I cannot imagine it being so great to drive prices down to these levels. A more likely explanation to me is simply the excess swing to the downside that tends to occur with reversion to mean.
December 18th, 2008 at 6:53 pm
All in on this puppy as of today and I may get killed but at least I don’t have to worry about profit margins, LOL.
Japan unveiled Y20T share purchase program – I wonder if this is for equities on JSE?
December 18th, 2008 at 7:11 pm
Considering the dollar weakness over the past few days, the plunge is even deeper in real terms than the graph shows.
December 18th, 2008 at 7:18 pm
What is most peculiar is the dollar losing value while oil, which is priced in depreciated dollars, continues it’s descent. Lack of demand is NOW starting to weild its’ influence. The initial pressure to make the price descend was the hedge fund screw the little guy by jacking with commodities burst bubble. The great unwinding of a scam bigger than Madoff is out in the open. Now for the health care premium scam. That is a more serious game and is seriously gamed. We’ll see. As to oil, look at 1973. The price is going to go back up; WAY UP.
December 18th, 2008 at 7:19 pm
Winston Munn:
“…A more likely explanation to me is simply the excess swing to the downside that tends to occur with reversion to mean.”
No, no, no. It’s because I bought some of the f—ing stuff yesterday. I should sell a negative image trading sheet–anytime I buy, you’ll know to sell, because it’s soon going lower.
But seriously, if it goes much lower than it is now, we’ll have a severe supply problem in no time.
Oh well, in the meantime, it can’t go below zero I suppose. I’ll let you know when I sell so you’ll know when to buy…
December 18th, 2008 at 7:24 pm
The trading range (of the markets) still gets narrower by the day. Amazing how quickly we adapt, it’s quite boring now to “only” have 2% daily moves.
December 18th, 2008 at 7:29 pm
As AGG points out: The cure for low oil prices, is of course… low oil prices.
December 18th, 2008 at 7:35 pm
@ Curmedgeon,
I am glad to see I’m not the only “Mr. Market Timer” around here.
December 18th, 2008 at 7:36 pm
I actually finally picked up a small amount of DIG today. It’s a long term (well, maybe longer than a day, which is “long term” nowadays) play that I’ll add to on any major dips. Can it really go that much lower without big consequences for all?
December 18th, 2008 at 7:37 pm
Sorry, Curmudgeon (Can’t type worth a darn.)
December 18th, 2008 at 7:39 pm
Don’t look at the fall part of the graph all the time, look at its a crazy rise too. I think the true price is much closer to $30 than $145. Especially with Bush/Cheney/Saudi Arabia on the way out of office.
December 18th, 2008 at 7:47 pm
I don’t think a precipitous drop like the one we’ve seen in oil is a harbinger of things to come. Oil is still a nonrenewable, rapidly dwindling commodity, and unless something sudden and radical happens in the way of an alternative, the cost (if not the price) will go up in the near- and long-terms.
December 18th, 2008 at 8:01 pm
@DP,
I feel that! I had to wait two hours today for a 12 point ES move and we use to have that on a 5 minute bar. lol.
December 18th, 2008 at 8:05 pm
I think it has less to do about demand destruction and more about OPEC members cheating to help pay the spending deficits they’ve incurred due to expectations of higher prices from last year.
December 18th, 2008 at 8:12 pm
It’s amazing how fast oil prices have fallen. Oil has enough momentum to hit $30.
December 18th, 2008 at 8:24 pm
i suspect demand destruction is much higher than has been reported. as of a couple of months ago it was 900k barrels a day. but it seems that those were over inflated numbers. its probably down almost 2 million barrels a day now.
December 18th, 2008 at 9:26 pm
Hark; the automaker rally cometh.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGHdHOHwvZWo&refer=home
But Hank says a rescue must include some assurance that they can survive and be viable in the future. How can they have assurance about that? Stop gap loans are not going to do it.
The only way would be through bankruptcy reorganization.
Or, is W just kicking the can into Obama’s path so they don’t go bankrupt on W’s watch, thus protecting his sterling legacy?
December 18th, 2008 at 9:27 pm
when does the price of oil go back up?
December 18th, 2008 at 9:45 pm
Cripes! how do I get into the oil rebound trade! It’s Christmas for goodness sake I want a holiday. Do we have to start placing our commodities bets already?
December 18th, 2008 at 9:47 pm
To answer myself, no. I’m out until after the holiday break. But I will be doing lots of reading.
December 18th, 2008 at 9:47 pm
All those oilsand plays in Canada that were such darlings 2 years ago are in deep shit if this price gets much lower. Err, actually, it already passed that point. They are over their heads in shit…
I sold when I got tired of investing in an environmental nightmare (only reason they get away with what they’re doing is there is just no one that lives anywhere near the pits and tailing wastelands that isn’t employed in the oilsands biz). Lucky me, who would know SU would be knee-capped like it’s been in 2008…
Also, without the suck of the oilsands processors, that pipeline Sarah Palin is so goo-goo over will NEVER get built…
December 18th, 2008 at 9:58 pm
I agree with debreuil. If you block out the last 8 years of crazy oil bubble $36.50 looks like near record high oil prices. Check this graph from the gov to see what I’m talking about.
http://tonto.eia.doe.gov/dnav/pet/hist/wtotusaw.htm
The rise was insane not the current sell off. We could easily see $25 / barrel oil again. We were in the single digits for a barrel of oil in 1998 just 10 short years ago. I doubt we’ll see single digits but its possible.
December 18th, 2008 at 10:03 pm
USO closed at $32.73. If you think oil is going to go up long term, intead of buying USO at the current price and risking it dropping and being under water, why not buy calls. You can buy the January 2010 $50 calls for $4.30. The 60s for $3.10. Or sell the puts. You c an get $12.90 for the Jan 2010 $40 put. Or you can play it safe and sell the Jan 2010 $20 put for $2.15.
Personally I like the call play. If within a year oil goe back to 70. The call should be worth $17.
December 18th, 2008 at 10:17 pm
Drill, Baby Drill!
Or uhm…am I day late and a dollar on that call?
December 18th, 2008 at 10:45 pm
Can you say supply shock. Keep it up boys, you’re setting it up big.
December 18th, 2008 at 11:15 pm
Haven’t seen Matt Simmons, of Peak Oil fame, lately. Wonder if he’s still getting paid big speaker/consulting fees for selling the fear to the sheep?
There’s actually a scary global aspect to this thing. The market has seen such a dramatic collapse that we will probably see some destabilization in some large countries, i.e. Russia. I don’t really follow the russians too closely, but is there a chance these guys default again? How bout all that money that got plowed into the UAE? A Venezuelan default is a certainty. Is that going to be part of the story next year? Is that what helps sends us to SP500 at 600?
December 19th, 2008 at 1:28 am
Oil is at $40 and everybody tries to figure out: How could it have happened. Will they melt their rigs down into plowshares. Terrifying. Better than feeling the fool. Four years ago oil was at the current price. Six years ago oil was at $20. We could drowned in the stuff then and could now. I believe in Supply and Demand, but the question is Supply and Demand of what? $140 oil, the Arabs and Big Oil surely did not want this — loved the profits, but man the price was way too much. They happen to know that there is fricking oil everywhere. They also know that beneath our very feet in the good ol’ U.S. is truly an ocean of natural gas. Why don’t we use it, well why would we, if you have oil you sell oil, if you have tankers you ship oil, you are not in the gas business. The gas business belongs to Canada. Would you get up Monday morning if you ran a utility burning coal and say I guess I’m going to change over to natural gas. Harriett call Union Pacific and tell them what they can do with their trains. I’ll call Peabody myself and tell Jim that coal is dirty. Wow, maybe the kids will take me to show and tell at school.
Duh. In a country where you would fight for years to maintain the right to burn coal in the dirtiest ways you can imagine — So Solar, Wind — wake me when Obama starts on the grids.
So see you all at $20 oil, and that is a generous measure of return to the mean.
December 19th, 2008 at 3:17 am
Wall Street ripping off the working american
demand is down 5%
oil is down 200 %
I’m glad the hedgs funds and pension fund lost a ton of money
December 19th, 2008 at 5:46 am
In the last 5 years, by eyeballing this chart, there has never been a sharper increase in bullishness over such a short period of time. If you don’t think it is justified in a coming depression, you are like me and ought to be all in short.
http://www.investorsintelligence.com/x/free_chart.html?r=101#
December 19th, 2008 at 5:58 am
Thank you Vince Farrell…keep up the good work. You are very reassuring to investors. We need you to lead the lambs to the slaughter.
December 19th, 2008 at 6:10 am
SB,
did you catch that cat on WWEx? Who is he in hock to? he seemed that he was so nervous not to forget his lines, he wasn’t even gracious when wished a Happy Holiday..
to say he’s beyond belief, is to be saying more than thing..
December 19th, 2008 at 6:23 am
Vince, seems to act like a puppet of somebody. Who knows in the big money world he lives in.
December 19th, 2008 at 6:29 am
Meanwhile they are protesting in Russia: http://online.wsj.com/article/SB122963701381519641.html?mod=rss_Page_One
December 19th, 2008 at 7:05 am
BR, can we have some thoughts on the FED’s trying to stoke inflation? I have heard several economist say that, “at some point it will succeed,” but all I ask is why are they so certain that it will? To use the old plumbing analogy, do you not have to first remove what is clogging the pipes, before adding more and more water into the pipes?
December 19th, 2008 at 7:12 am
When evaluating commodities, it’s ALL about break even cash flow. Go look at every commodity sector over an entire cycle and you’ll notice that they only break even. They can’t generate more profits than the industries that produce the end products or these products won’t get made!
If you do your homework and go into Cdn oil companies’ income statements, you’ll see that the cost to produce a conventional barrell is around 50$. With its oil sands, Canada was gearing up for 100$+ cost of production… so you see that even with high oil prices, companies always produce to break even.
We might be close to PO but there is still a lot of oil out there over the short term. If there weren’t, the middle east would be thinking a little more about sustainable development! We just went through 10-15 years of 20$ oil. I’m sure there is at least 10-15 years of 30$, 40$, 50$, 60$ oil out there.
If you look at the price of the products you were buying and tally all the costs of production, it’s pretty obvious that 100$+ oil never even made it into most products! All this tells you that something was very wrong in the world of oil… China subsidizing the oil consumption, derivatives, etc.
December 19th, 2008 at 7:16 am
But if oil goes back to 100$ or 200$, then you KNIW the Fed has overshot!
December 19th, 2008 at 7:17 am
KNOW
December 19th, 2008 at 7:45 am
JustinTheSkeptic:
If the feds sent you 1000$ per child, 1000$ for heating/electricity, 20K$ in SS, unemployment cheques, a refi at 3% fixed 30 years, would you cash in the cheques or send them back to them?
If the feds start sending cheques to companies for them to rebuild America, will these companies cash them in or send them back?
It’s quite easy to get the money into the system. The problem is the Amercian psyche… they can only do this when other attempts have failed. Since the attemps are now failing, the cheques will soon be on their way.
December 19th, 2008 at 8:05 am
Most people / companies would cash the cheques. The real question in this economy is whether they spend it or hoard it in case they lose their business / house / job next year.
December 19th, 2008 at 8:31 am
They’ll hoard until they spend. And the more everybody hoards, the faster they’ll have to spend it.
December 19th, 2008 at 9:10 am
Now it’s at$34 and change. THIS is supply and demand in action. Someone has a few January contracts they are desperate to unload and the vultures are circling. Feb, Mar, and so on look a little more like recent weeks in price on the NYMEX.
BTW, did anyone read in the WSJ about some company in China repudiating some oil derivatives with GS? It may be that China decides to tell the GS bastards to f**k off due to market manipulations they participated in earlier in the year and the debt is not valid as a result. There is wonderment if this will be a trend among Chinese companies. Ho Ho Ho. Go China. Set the trend for future reference. Compliance with contract terms is now optional if, in the future, it becomes apparent that fraud was a part of the environment in which contract terms were agreed upon and your counterparty was a part of the fraud. Thus, clean hands and pure intentions must be a part of the entire agreement, even the background environment. Those damn pricing memos are now coming back top haunt GS. Ho Ho HO.
December 19th, 2008 at 9:16 am
danm,
My reply
If the feds sent you 1000$ per child, 1000$ for heating/electricity, 20K$ in SS, unemployment cheques, a refi at 3% fixed 30 years, would you cash in the cheques or send them back to them?
[that doesn't fix the problem, the problem is assets are already too high...way over valued]
If the feds start sending cheques to companies for them to rebuild America, will these companies cash them in or send them back?
[again, it does not fix the problem, the problem is that assets are already way too high...way over valued]
It’s quite easy to get the money into the system. The problem is the Amercian psyche… they can only do this when other attempts have failed. Since the attemps are now failing, the cheques will soon be on their way.
[again, it does not fix the problem, the problem is that assets are already way, way too high...way over valued].
December 19th, 2008 at 9:26 am
danm,
My point is that until natural market forces fix the problem, we will keep coming back to the same old problem. Markets are ment to adjust UP and DOWN. What the FED and Treasury are trying to do now and have in the past, is falsify the market mechnism. They were right to let the weak banks fail after 1929, and they should have let it happen today. What they did wrong back then was not to go in a support people money. WHAT SHOULD ONLY BE GARANTEED IS MONEY THAT HARD WORKING PEOPLE HAVE GOTTEN SCREWED OUT OF, because they are the ones that will rebuild the country once everything clears.
December 19th, 2008 at 9:31 am
JustinTheSkeptic, assets are priced in dollars. So they can remain at their current prices by lowering the value of the dollar.
December 19th, 2008 at 9:45 am
Justin:
I never said they would fix the problem. I think they will create a bigger one: huge inflation. Maybe I’m wrong.
But at the end of the day, they will do everything in thier power to devalue that debt and every scenario leads me to think that the screw-ups will get bigger and bigger.
December 19th, 2008 at 9:50 am
This is only the Jan roll getting blown out. All other months are bid above $40. Check out open interest and volume in Jan and you will see that they are non-existent. Every one is trading Feb and March…
December 19th, 2008 at 9:57 am
E, I know all that econbabble, but at the end of the day all things being held equal it is real terms that matter, and in real terms we have sold ourselves to the devil! Value comes in producing real goods and services – something hard, or something that makes something hard and durable. Think machines that make machines and machines that move something hard. Yes, you can do paper things, like sell insurance, give massages, etc., but at the end of the day, once you perform them they evaportate into thin air, hard things do not. So, when you do have your periodic repricing downward (deflation), you’ll still end up with something. This is why gold silver, and commodities look so good right now.
December 19th, 2008 at 10:35 am
And if you give a massage and you get an IOU from your partner, the other person owes you that massage somewhere in the future.
If you sell a brick and get an IOU for a bowl of rice, you are owed a bowl of rice in the future.
In bothe cases, there needs to be trust whether or not it’s hard assets or services.
Actually the US needs to get away from the hard assets stuff because maintaining them or creating them uses up a lot of energy.
The problem is that human beings are materialists and furthermore, hard assets are easier to account for. That’s why the US is going to have trouble changing gears. Leaders are going to focus on visible works so this implies, energy intensive projects.
The other reason why I have trouble seeing our western world reducing it’s energy consumption is because human beings will always be attracted to scarce goods. As energy and commodities get scarcer and scarcer, they will be coveted more and more. Example: poaching of near extinct species.
December 19th, 2008 at 11:04 am
But the brick has a (not permenent) longer lasting one-to-one trade-off in value, but the rice once eaten is gone, only creating “natural inflation” in the process. Yes, it would be nice to see a world in which hard assets were less coveted, but then one could lie about what the different values behine curtain number one, two, and three are, knowing that the value is make believe…a la Phoney Madoff.
December 19th, 2008 at 11:28 am
Yes. And what about the buildings that went up in Toronto, using Italian Marble and now crumbling after 1 or 2 decades. “But they were supposed to last 50o years!”, they cry. Yes, but that was in Italy, not in the freezing cold.
And let’s be honest, where are the vast majority of the hard goods we produced in the last 20 years? Try the dump.
Hard assets are just as important as services. That’s where we have to use our heads and figure out how to spend our energy efficiently. That is produce goods AND services that will give us a better quality of life and make us richer.
But people keep on focusing on hard goods. It’s definitely a love story. People want to spend 100K on a Porsche and get that massage for free because they own the Porsche.
Of course, it’s much easier to get filthy rich by selling assets than by selling services. You can thank leverage and economies of scale for that. Thus our love affair with hard assets.
But hard assets will be our downfall. Limits in energy will kill our system.
December 19th, 2008 at 2:04 pm
Oh, I’ll agree some of it ends up in the dump, and we as americans are fools in so many ways. Have you ever been overseas to places like europe where they appreciate old buildings and don’t adhear to a throw-away society? They maintain the “hard goods.” If things really do deteriate economically, it is the modern U.S. citizen who will be the most effected, because they cannot, and do not know how to live without throw-out this and toss-away that…and fast food, and etm’s, etc….
December 19th, 2008 at 3:29 pm
Yes, I’ve been in many museums too and by the gloomy art realized just how hard life was throughout history. Just visiting the cathedrals built in the middle ages and still standing today made me understand how majestic they must have looked then.
I realized how lucky I was to be born in the most comfortable era of all times and that it probably would not last.
Europe builds things to last longer but their way of life is not sustainable either.
But I still think their socialism is somewhat a reflection of their economic maturity. A movement from goods to services. Services manage the goods! For example, have you seen the underground postal system in Paris? Impressive.
December 20th, 2008 at 6:29 am
DanM says – “If you do your homework and go into Cdn oil companies’ income statements, you’ll see that the cost to produce a conventional barrell is around 50$. With its oil sands, Canada was gearing up for 100$+ cost of production… so you see that even with high oil prices, companies always produce to break even”
me – makes ya wonder if last year was a massive field experiment to determine the worlds ability to cope at price levels – if so, where do you think the super computers are putting the point of demand destruction vs max return … with the twist of R&D for the future vs killing (acquire) the opponents attempt to jump out in front?
DanM and Justin jumpin in here
on material things vs services – it needs to be phrased more like this poster I made (but with a twist) because if a catastrophe hits you and yours (like bad weather or a job loss or etc) one thing you can always take with you – the other stash maybe not
What d’ya wanna do?
What d’ya need to do?
What ya gonna do?
Get ur done.
http://grfxplus.dotphoto.com/CPViewAlbum.asp?AID=5287197&IID=191040240&Page=1