Oil price moving upward

As discussed in Oil and the energy crisis is the ‘next crisis’, WTI crude on a monthly graph was showing a price incline from it’s previous lows (please go to link and click on graph). From $ 37 in January 2009, now sitting at $43 which is gain of $6 on a monthly based contract. Interesting to note that with the global economy de-accelerating at an incredibly sharp rate and the oil price plunging, the global economy will not return to speed anytime soon (minimal growth for a few years). Oil is now showing a price recovery. This could indicate that oil is being stockpiled (declining demand and also preparation for demand), which is what I think is occurring, especially from net importers of oil such as China. Also in the mix are OPECS cuts, closures of unprofitable oil companies and simmering geopolitical tension from North Korea, Pakistan, Iran and the West/Israel.

refer to graph (please click on image):

Oil and the energy crisis is the ‘next crisis’

The global economic crisis hasn’t even gone half way through, but so far it has managed to drop most global indices by 20% 30%, smashed confidence that may take years to restore, revealed the slew of poorly run and badly managed companies (that have now been bailed out by the US government); consumers have been hammered globally from falling equity prices and big job losses, with more huge jobs losses to come. So it’s bad.

Oil markets have indicated how bad the global economy is, which is clearly indicated by the decline in big energy uses such as China and India, this energy use is gaged against the oil price; which has dropped from its all time high of $147 2nd June 2008 a barrel down to $35 on the 22nd December 2008. That is a 70% drop in six months. Oil clearly shows a severe price destruction so dramatic in a relatively short time span tells you how much the global economy is slowing and sharply.

The lower oil price has rebounded in January 2009, due mostly to the conflict in Palestine (Gaza) and oil cuts by OPEC in late 2008. The rebound from $35 December 2008 to $50 January also indicates the sharp spikes in oil pricing, in which the oil price is sensitive to geopolitical and US dollar decline. The other factor to watch is energy disruptions in Europe namely tension between Russia and the rest of the EU, namely gas supply problem between Russia ad Ukraine.

The global economic crisis has thrown the world into a deflation environment, so everything you can think of that has assigned value is being sold off, including energy based commodities such as oil. But energy is a critical factor in supply and demand dynamics, in a sociological sense an extreme necessity for human and society development. The supply aspect, especially with oil, is fading – take out the deflationary and economic slow down and we still have a lack of supply with oil and demand will still be high even with economic growth slumping and becoming static. Same with gas, any geopolitical, war or tension sends commodity (energy based) resources prices upward very quickly.

I discussed the potential of an oil price spike in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing, this was on the premise that Israel would strike at Iran’s Nuclear facilities in 2008. This didn’t happen, oil was already high at $113 a barrel and the global slump in 2008 sent oil lower. Still the potential for Israel to strike at Iran is there, if sanctioned by the US; Israel would strike Iran tomorrow. But a provocation by Iran cannot be ruled out this could occur at some point in 2009.

Some economists are now talking of a economic recovery in the middle 2009, I think that is very premature, possible demand might come back on for certain industries, hence commodity prices moving upwards. I would agree to that analysis, but the global economy is so wreaked and problematic from government interventions which is going to ensure inflation will return. Talking about recover comes from a certain angle (investment in certain industries), not from a general global economic recovery. So it is extremely speculative, especially in light of continued US dollar weakness into 2009.

But even on the talk of recovery in 2009 a lot of ‘crisis’ on the horizon are still approaching the world. The next big one will be energy.

Oil could stage a recovery into the high double digits in 2009, with it being very over sold we may see become attractive to investors on any sign of industry demand and hedging against the USD.

Please refer to graph (click on graph for larger image):

Also should be noted that general energy issues, such as Russia stopping gas supplies into Europe also puts upward pressure on the oil price.

If you looking at energy from an investor perspective is to see the potential in gains especially at such oversold prices on energy stocks, namely large oil and gas companies and the oil price it’s self.

OPEC and the Prisoner’s Dilemma By Kurt Zenz House

There is great article written by Kurt Zenz House for the online site Bulletin of Atomic Scientists

Regarding oil output cuts and the attempt for the oil producing countries to bring the oil price back into high dollar ranges, such as to $70 – $100.

He also mentioned Iran’s situation and it’s reliance on a high oil price, House’s article was written prior to the Israel/Gaza conflict.

Article found here

Car company bailouts, Goverments will print money into 2009, oil will go lower.

Even though 2008 will close off as a terrible year for the global economy, 2009 will turn out to be horrendous. As liquidity will literally dry up right across the board, the only money being pumped into the economy will come directly from the Central Banks. Not only will growth completely slump in 2009, there will be three aspects (bailing out banks, printing money, increased taxes/cuts to public spending – health and community) to economies which have a devastating effect on a society. With governments throwing billions into the financial system, that on the whole will end up creating zombie companies and propping up zombie banks. As mentioned in ‘Keynesian’ fiscal policy out of control – Australian government bond downgrades, the worst policy plunders a government can make is cushioning the banking system, that has operated in a incompetent and risky way. In other words, the banks or at least the banking model should be punished for it’s lack of care and bad management. This hasn’t happened, instead they have propped up the bad business models. There are going to be lasting effects of tax payer money going straight into buying distressed debt, toxic waste, MBS’s and every bad assets banks own; and don’t believe these ‘effects’ will be a positive for the global economy. Shifting ledgers and accounts by using government money and guarantees, has given banks the ability to recapitalizes their balance sheets, whilst shifting their depreciating assets into other ledgers. So not only has tax payer money being used to recapitalizes banks balance sheets ( but don’t expect to receive personal big credit/loan account offers ), governments have foolishly rushed into guaranteeing bank deposits, with guarantee caps going up to a million plus, the banks can now also re capitalize by selling secured debt or bonds that are now AAA rated. But governments who are now sending all their accounts into deficit, will find it hard to raise capital because government debt will naturally be downgraded, 1. from all the risk on their balance sheets, 2. bank debt is now more attractive to investors, compared to government debt.

Still, the final insult to injury will be governments finding it hard to raise capital; which will be left with the taxpayer again (us), in the raising of taxes and the cutting of public spending – especially health and social services. Nice deal hey?

Then the money printing, which will ensure that inflation will creep back, especially in the US as the US dollar declines rapidly into 2009.

Another example of poor judgment and mindless money printing and spending by government has been the car industry bailouts. Most probably some of the worst business models known to humanity are now all knocking on government doors. You can thank the worst government policy machine in the world which is American policy makers, who have no idea whats going on and their incumbent central bank (The Federal Reserve) which is literally out of control. So it’s a double whammy of economic stupidly.

The car industry will still shrink, despite bailouts and loans, but as mentioned the US have created a precedence; now Canada, Russia, the UK and even France are all considering doing the same. At some point jobs losses in the car industry will be inevitable, but with governments only pumping money into the ailing car industry for their own self interest, ie votes. The joke will be back on the poor car workers as profits will still tumble and the fact is jobs cuts (company restructuring) have already been planned by upper management.

With emotion aside, one has to be sensible at the ramifications of printing money into a severally hemorrhaging car industry. It is senseless, sure the governments can print money, but this will lead to currency destruction and inflation, with the other detriment being raised taxes and public funding cuts. The pain, should be felt now, deal with it . The upper management should be relinquished, company then goes bankrupt and taken over by a rival; say a Japanese based car company (that made better smaller cars).

Also on a analytically perspective. The oil price has crashed from highs of 147 to 38 a barrel, it could go lower. Over leveraged and hugely indebted car giants took massive gambles, with car production. Designing fuel guzzlers and uneconomical junk (refer to the Chrysler 300c). I wouldn’t invest a dollar into that industry, with the oil price totally unstable in lower ranges, indicates that the world economy is slowing down to crunch time. Industries are using less fuel, oil and any petroleum based products. These industries have also expanded on loose credit conditions, are all going to find it hard to raise capital. As a trader, you just need to bring up the oil graph and see the massive deflation in the oil price; with potential to go much lower. But with oil trading in a range at 40 and 43 a barrel indicates that demand has fallen off, therefore any oil related products or products that use oil (cars) have also fallen off. In other worlds, there is NO MONEY to be made in collapsing industries, like the car industry. Yet, the governments have decided to create yet another living dead industry.

Refer to WTI graph. Oil looks stabilized to a point: trading range 40, 43. This could be on the back of OPEC cuts. From a bull to bear perspective on the oil price, which has been a shock in the sense of much it has fallen. Points to the direction of the global economy, which is sharply down. At this point the oil price does not look like it’s in a recovery buy at any point at all. Some more selling into 2009 on economic factors could see the oil price bounce down to 35 a barrel

The falling Oil price and Treasuries ‘ bank bailout plan’ falls apart.

I have discussed on this blog that Hank Paulson ‘bank bail out plan’, that took congress days to pass, is essentially not going to happen in it’s entirety. The reason, it was from the start an unworkable concept. As discussed in All of sudden the ‘free markets’ don’t feel so free. Wall Street should take the pain. Bank ‘bail out’ bill will be passed, there is no way the market value could be determined on toxic mortgage assets, therefor the Treasury would be taking on uncertain risk with valueless assets which they have purchased at a premium. Meaning, there is no way the US government (using taxpayers money) will know when to sell, especially in a depressed market. If the toxic asset deal was to have gone ahead the banks would unload everything they have onto the US government’s balance sheet; now it seems The Treasury has realized this hence Paulson reworking of the ‘bank bailout’. If however the Treasury decides to purchase shares in financial institutions, they would have done what every other Central bank has done.

So, not only has the Federal Reserve under Ben Bernanake and the Treasury under Henry Paulson caused widespread volatility in the markets, they are also confusing the market. Which will psychologically cause markets just to ‘sell’.

The banking crisis will come back onto the boil and I suspect we will see spreads widen with interbank lending. So essentially risk aversion will come back with ‘sell’ orders on just about everything.

If we to say that the markets could maintain rallies into next year, this most likely will NOT happen; the whole world (as far as the stock/currency markets) could be heading full force into risk aversion, well into 2009.

Remember when oil was $147.00 a barrel? It now sits at $55 a barrel a $92.00 decline. With a major sell off occurring from September 2008 to present. From the 1st of September 2008 to the 15th of September the oil price was showing some instability (refer to charts CCI (2) 3 – using quoted date range); the price of oil then rallied from the 17th to the 22nd September 2008. In which it then collapsed to it’s present price range. Can oil go lower? Yes. If the global recession is deep, hence a depressed global economy, oil could sink under $50.00 a barrel. Oil has yet to find a stable price range, one could argue that $100.00 could be that range. But with oil spiking on high demand, then dramatically been sold off on weak demand, both are neither good for the global economy. If oil does drop below $50 this could significantly effect the gulf countries that rely on oil income.

Please refer to graph (click on graph for larger image)

To think that foolish UK prime minster (Gordon Brown) asked the oil producing gulf states to contribute to the IMF fund. If we do see a further collapse in the oil pice, I suspect Saudi Arabia will be kocking on the IMF door for money.