Van Santos

We are back to 2006/7 gas prices and for what, exactly? It’s not demand. That has fallen by roughly 2 Million barrels a day. It’s not Geopolitical. While tension between Iran and Israel continues, what we are seeing is nothing new. We are now seeing two factors:

1) Oil producing countries need the money to fund government operations, therefore cut production to raise cost. (spoke about that here)

2) Now investors are looking at the economic conditions, see that inflation is coming and are turning to commodities as a way of protecting themselves, as well as hoping that the worst for the economy being over

Oil prices soared above $71 a barrel Wednesday to reach a 2009 high, as investors poured money into crude markets to protect themselves against the inflation risks posed by a weakening U.S. dollar.

Oil, which typically trades inversely to the dollar, has more than doubled in price in three months as traders also cheered news showing the worst of a severe U.S. recession is likely over. They brushed off data — such as a 9.4 percent U.S. unemployment rate in May — that suggest crude demand will remain weak. Even growing inventories have not checked crude’s stellar rise.

The bottom line here: this is Bull! If there was ever a time that the consumer should pay attention to the price of oil it would be now as our current situation shows how vulnerable we are to just about anything. There is no realistic reason oil should be this high. This is purely a profit drive by producers and investors.

There are two major forces behind the recent rise in oil and gas prices – seasonal flux and production cutbacks.

Let’s forget, for a quick moment, that the world is in the worst recession in years – possible even a depression – and say things were “normal.”  This would mean that demand, specifically in the U.S., would really start to pick up.  As a result, traders and producers would start to bid up the price of oil ahead of the expected increase in demand.  The problem, however; is that we are not in normal times and travel and oil consumption in the United States is off anywhere from 10% to 30% (depending on the sources you read).  

Well, even though the price of oil should be heading down – and even though the world faces horrid economic times – Saudi Arabia says the world can cope with the price.

Saudi Oil Minister Ali al-Naimi, speaking on the eve of a meeting of the Organization of Petroleum Exporting Countries in Vienna, said oil prices would continue to rise and that the global economy was now strong enough to support $75-$80 oil.

“The price rise is a function of optimism. Better things are coming in the future,” Naimi told reporters in Vienna.

The guy is flat out wrong.  

Not only are economic conditions deteriorating, such a move on their part will only prolong any economic recovery as companies will need to pay more for energy. Their reaction will be to cut the need for energy.

The ONLY reason Saudi Arabia wants to see elevated prices is simply due to the fact that the majority of OPEC countries obtain their funding from the sale of oil.  Since the recession kicked in, OPEC countries have faced hard economic times… their money well has dried up… and all of a sudden they need more funding.  

Where do the naturally turn– oil.

So, consumption is down, that means producers reduce their inventories and refining capabilities, which in turn means OPEC needs to cut their production in order to inflate prices.  Folks, we are almost paying 2007 gas prices simply because OPEC countries need funding for their government.  Allowing for oil to be at this level, and not speaking out against price gouging,  is another way of providing yet another bailout – this time to foreign governments.

Gas

Depending on where you live in the country, the price of gas will vary.  There are a number of factors that play into the regional price – local emission requirements, demand, refinery capabilities – but overall the price should be semi-reflective of the oil consumption/demand of the nation (or world) in general.

Have you noticed that the price of oil has dropped within the last year?  Damn right you did, because you say the price of gas drop significantly. Within the last month, however, have you noticed that the price of gas is starting to slowly creep upward?  You may not have noticed yet, but I’m guessing you will shortly.

In Chicago, the price of gas is ranging from $2 to $2.25.  Seeing that the price of oil is range bound from $35 to $45, doesn’t it see peculiar that the price of gas is starting to rise?

The rise in gasoline is directly tied to the oil companies – this time. 

When the price of oil was at $147/per barrel, the oil companies had no choice but to raise the price of gas.  To place blame on those organizations for the jump was unfair as they had very little control over the energy market, the futures traders and investors did.  This time, it seems, the oil companies are moving the price up due to technical issues, as well as the decision to cut refinery capacity due to “a lack of demand”.  

Such action on the part of oil companies appears as if they are testing the limits of the consumers.  

Unemployment

Yep, the nationwide unemployment rate hit 8.1% this past February.  That is a jump of half a percent from January’s 7.6%.  

Quite scary, no? 

Here is something even scarier: If you are black, unemployment is now at 13.4%

“Unfortunately, the black unemployment rate is typically about twice the white unemployment rate,” said Algernon Austin, director of the Washington, D.C.-based Economic Policy Institute’s Race, Ethnicity and Economy Program.

“In recessions, you typically see a black unemployment rate increase significantly.”

The coming week doesn’t have a lot of economic data, but the market will continue to look for evidence of a recovery.  My guess would be that the market will continue to bounce around current levels.

Things to watch

I have the last Futurama Movie, “Into the Wild Green Yonder” in my possession and hope to watch and review at some point this evening.  

I’m rather torn about watching this movie, as I believe this will be the last in the series.  The initial DVD Movie Release did very well despite the fact that the effort was sub par. The second movie was… just weird… while the third returned Futurama to the glory fans used to know. I would love to see the show continue on, but I fear the writers are trying too hard…  

On to another show…

Season Three of Venture Brothers is coming out on 03/24/09.  If you’ve never experienced the joy that is Venture Brothers, I suggest you start with Season 1.  You’ll find some of the best comedic writing on television, hands down.  

Do you, or your man, need a mirdle?

A London department store is hoping to cash in on the lucrative men’s underwear market Thursday by launching a throwback to the Victorian era, a gut-cinching garment that designers say will help men make it through these belt-tightening times.

The stretchy contraptions resemble normal sleeveless tank tops or long-sleeved T-shirts — only shrunk down two or three sizes in a special blend of Spandex, nylon and polyester. Control underwear will be launched later this year.

“It makes waists look trimmer, improves posture and helps men get into the latest slimmer-fitting suits,” said Gavin Jones, head of the Australian company Equmen, which launched its male shapewear line in Selfridges on Thursday. “Men are under a lot of pressure right now to perform financially, socially and romantically. Why shouldn’t we have the same products that women have had for years to make us feel better?”

Really?

It’s called eating less and working out.  Look into it.

UPDATE: 03/09/09 

Yeah, no Futurama “Into the Wild Green Yonder” review this envieng.  I got caught up in another project I was working on.  I’ve added it to my list to do for tomorrow! Now I’m off to play some Bioshock.

I had previously said that Oil could not have fallen at a worse time because the U.S. Consumer has a short memory.  They are back to their old ways, starting to purchase SUVs with no regard to the fact that oil will once rise again.  

Another reason the fall in oil prices could not have come at a worse time is due to the fact that technical advancements will come to a stand still.  Companies no longer need to spend money in order to find cheaper source of energy since oil is cheap enough. 

If the U.S. Wished to stay as an oil consuming nation, but desired to break its dependence on foreign oil it could do so by turning to lands within the Western United States.  The answer is oil sands.

Oil sands, or tar sands, are a combination of clay, sand and bitumen that can be mined and refined into usable oil.  The problem, however, is the process is rather pricey.  It can cost up to $70 to produce a barrel of oil from Oil Sands, and when the price of oil is currently at around $45, there is no motivation for companies to continue development.

Since Oil Sands mining and refinement is rather new on a significant scale the price to produce will – naturally – be high.  The only way cost will decline is if the technology is utilized on a large scale, so the technology is no longer “unique”.  

So, here is my question:  If the government is truly concerned about becoming energy dependent, what will it do to keep such projects moving forward?  What will it do to keep innovation from victim to a slowing economy?

The Weather Research Center, a 22 year old non-profit organization, has released their predictions for the 2009 Hurricane season.  This is interesting news as the Oil production community tends to rely on the WRC’s information to help gauge/predict potential impact on production for the coming year.  Obviously, not an exact science, but still something to pay attention…

So, what does the WRC predict for 2009?

• Number of Named Storms: 7
• Number intensifying into Hurricanes: 4
• Number of Hurricane Days: 7
• Number of Tropical Storm Days: 47
• US Landfalls: 3
• Cat 3 or Higher Storms in the Atlantic: 50%

The WCR suggests the highest risk of landfall for a Tropical Storm or Hurricane is from Louisiana to Alabama with a 70% Chance.  Mighty close to the oil production centers in the Gulf of Mexico.

When Hurricane Ike pushed through the Gulf of Mexico in 2008, the price of oil continued the previously established downward pattern.  Now that oil is range bound from $35 to $45 dollars, and OPEC has cut output drastically, what would happen to the price of oil if a major storm hit production centers in the Gulf?

American’s just don’t get it, and I fear the masses won’t internalize our national dependency and the  need for alternative energy sources until it is too late.

This is not a rant about global warming – that is another discussion for another time – this is simply pointing out that American’s just don’t get get that the price of oil will rise once again.  Just because it’s $38 today doesn’t mean it will be $38 tomorrow.

According to edmunds.com, pickups and SUVs will outsell cars in the month of December.

Trucks and SUVs will outsell cars in December, according to researchers at the automotive Website Edmunds.com, something that hasn’t happened since February.

 

Meanwhile the forecast finds that sales of hybrid vehicles are expected to be way down.

 

Combined with discounts negotiated at the dealership, the actual prices consumers pay can be amazingly low, said Edmunds.com sales analyst Jesse Toprak.

 

“I can get about $10,000 off a large SUV,” he said.”There’s probably not going to be a better time.”

He is right, he could get roughly 10K off an SUV but what about when the price of gas goes back to $4/gallon, be it a year from now or three years from now?

Let’s say a large SUV has a tank size of roughly 20 gallons and gas goes up to $4/gallon once again.  This means the consumer will be paying $45 more per fill up.  If we assume they fill up the tank every week, that means they will spend an extra $2340 per year and if 4 years that “savings” would have vanished.

Now is the worst time for oil to have fallen because everyone, from corporations to the consumer, will be moving away from researching and investments in alternative energies because there is no cost savings. Why spend the money on research and development if it costs less to simply buy oil?

Now is the time we should be moving to hybrid technologies, now is the time the nation should be going to solar and natural gas… basically, now is the time we should be looking forward and attempting to find a way to free our nation from dependency on foreign oil, not trying to go back to our old ways.

I’ve written about the price of oil and gas a few times, and by no means am I an expert, I do have some experience on my side that allows me to objectively – and intelligently – discuss the subject.   That said, let’s get the main point out now: The price of oil is too low.

When previously talking about gas and oil prices (12/6) the price was right about $40, and as of today, December 27th, a barrel of oil fetches $37.71.  So, what is going on?

News concerning the global economy, the massive drop off in spending, and credit issues has energy traders selling as if a drop of oil will never be used again. Much like there was a dramatic upswing this past summer, the market correction is moving dramatically – and unrealistically – in the other direction. Even when OPEC announced a cut of 2.2 million barrels starting in the new year, the price oil moved lower.  In many ways it feels as if people are treating oil as if it a renewable resource all of a sudden – it’s not.

Isn’t oil a supply and demand commodity?  Yes, but the market is trading oil as if the demand falling at a rate greater than the cuts OPEC has recently announced.   As it stands today, oil is trading as if the expansion of the economy in the last 5 years never happened.  It’s acting as if the population of the world has not grown, as if China and India never grew, and as if there are less cars on the road, worldwide, today than 5 years ago. Energy traders, in the bearish mood and focus they have, are simply guessing at what a potential reality may or may not be when it comes to the price of oil in the current environment.

With price falling we can expect another impact on the economy – oil producers shutting down exploration rigs. Basically, the decline in oil price has lead to a marketplace it has become unprofitable to produce as much as they had previously.  

If downward pressure continues, which it looks as if it will until there is a catalyst to change the mood of the market, the consumer will be able to enjoy low gas prices.  Just remember, oil is not a renewable resource… the price is bound to rise once again.

The collapse of the commodities market, specifically the major drops in the price of oil and natural gas, has caused an economic crisis in Russia due to their high dependence on both commodities.  Add in the falling price of the ruble and roughly 70 banks going under, Russia now faces their version of the 2008 collapse.  

While their government tries to calm investors by saying the volatility is due world economic conditions, the falling price of oil may significantly impact their ability to quickly – and independently – come out of the crisis on their own.

Last Friday, the World Bank came out and ward that Russia may need a bailout of their own.  

“If oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare scenario for a global economy,” Zeljko Bogetic, the World Bank’s chief economist in Russia told investors on Friday. “The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it’s possible even to envisage Russia’s return from a creditor to international organizations to (that of) a borrower.” 

Translation – if oil continues to fall the Russian government will have revenue decline significantly, and as a result, the government will need to turn to the World Bank or other governments for loans in order to continue to function.

I believe this is exactly why OPEC countries decided to cut output as drastically as they did recently. Each country relies of oil revenue in order to fund government activity.  As the money dries up, so does the ability for the governments in question to provide funding for needed programs – like military spending.  

So as we look at Russia potentially turning to the world for money to survive, other countries dependent on oil revenue may not be far behind.

Remember how I mentioned that oil was dropping uber fast, and that if the decline continued gas has the potential to hit $.99 again?  Do you also remember how I mentioned the only way to prevent the decline is with some major event?  Well, there is one on the horizon – OPEC has signaled “significant” production cuts in hopes of stopping the potential slide.

Via Bloomberg:

A “severe” cut may be needed to halt the decline in prices, group president Chakib Khelil told the Associated Press in a Dec. 6 interview.

The members of OPEC believe that a reasonable price for a barrel of oil is roughly $75, but obviously the market doesn’t agree with the thinking right now.  But why does OPEC hold this view?  The countries that have membership in OPCE obtain most of their government budgets from the profits pulled in from oil sales.  The lower the price of oil, the less funding available.  The less funding available, the less money for things such as roads… schools… and military spending.

In case you were curious as to what countries made up OPCE, here you go:

• Algeria
• Angloa
• Ecuador
• Indonesia
• Iran
• Iraq
• Kuwait
• Libya
• Nigeria
• Qatar
• Saudi Arabia
• United Arab Emirates
• Venezuela

As it seems I have no “normal” hobbies, I tend to do a lot of reading about the financial markets (finance, commodities, stocks) and I feel safe saying most people have no clue just how low gas has potential to get in the next few months.  While this low will be temporary, you still will be surprised.

Essentially, the bottom has fallen out of the entire commodities market.  Metals, Oil, Natural Gas and Agricultures are falling as if people will never need to drive, build or eat again.  For example, the price of oil has fallen from almost $150 this past spring to roughly $40 this past Friday and, obviously you’ve see the price of gas at the pump fall too.  All of this can be tracked back to the recession; the “pop” of the speculation bubble and the financial melt down.

Historically there is roughly a 6-week lag between the price of oil and the price of gas at the pump.  So, while oil has dropped $25 in the last month (from roughly $65 to $40) the price of gas still has more room to drop.  Based on the close price of oil today ($40), one could reasonably expect to see the U.S. average for a gallon of gas to drop to around $1.35 within the next 4 to 6 weeks.

As with all things financial market related, market “corrections” tend to over swing both ways.  Oil at $150 was way too high for current condition and supply (part speculation bubble) and oil falling like a rock is the correction of that bubble.  Where is going to stop, no one knows… but if it continues to fall, say to the level of $20 per barrel, the U.S. could see $.99 for a gallon of gas once again.

This could change at any time – an unexpected war, production interruptions, terror attack – but as long as oil continues to fall hard, gas is going to follow.

Think I am making this up?  Jan 09 Unleaded Gas Futures are now at .90