Wednesday, December 24, 2008

Oil Has Not Reached Bottom

Yesterday I was looking at oil prices and found something interesting. The price of WTI oil was about $7 or $8 below the price of the other two contracts listed. I asked if any of my readers could explain such a big difference in prices and reader Bill came to the rescue.

Yes it is what is know as cantango. when the futures prices end up with a much higher spread level. It has been going on if you look not just the cash and feb contract but out 6 months it has been widening.

It is because there is no storage available and no real credit to buy the oil to store. In normal times the out prices are in line with what can be made after paying the cash price the interest charge and storage charge, Then you sell the out contract and lock in a profit. None of these are available, It has been common knowledge that many oil producing controuies have been leasing tankers to just float on the sea and hold the oil they have no market for.

This is a very bearish setup. Until it breaks oil with go lower.
Reader Frank had something else of interest to add.
Bill is correct about oil. The exact opposite is happening in gold futures, that is, backwardation. There are more buyers for physical gold than there are sellers.
So in order to buy gold coins for example, you must pay a good premium above the current spot price to get delivery now - and that's IF you can find a seller.
So what does it all mean?

Lower oil prices, probably much lower and higher inflation (in 2008 the official figure for inflation was about 6%), so much higher inflation is probably in store.

Well I'm no economist and I have no money to put into any market and this advice is worth exactly what you paid for it, but the thing to do in times of high inflation and low interest rates to protect your assets is to buy real property. In other words it is time to buy houses.

Cross Posted at Classical Values


Anonymous said...

We've actually got two different forces at work on the commodities that will determine our inflation rate next year: oil, which is going down, should bring inflation under control. Massive cash influx, which should jack inflation up. Gold is merely one possible indicator of inflationary pressure, but I'm not sure how correlative it is at this particular time. Our markets are in ridiculous flux right now, so I think we're in unknown territory for a while, at least.

The thing to keep in mind about the cash spigot that The Fed and Treasury have opened up is that it's actually replacing an enormous loss in wealth that we've suffered over the last year. It may, in fact, not be enough yet to replace everything we've lost. I've seen different numbers. YMMV!

Plus, while a whole bunch of money has gone into the system, the banks are a roadblock right now. They still aren't lending. And until they do, the cash that's out there is doing nothing. So we are dealing, at least in the short-term, with pretty strong deflationary pressures.

This, of course, does nothing to address the elephant in the room: $50 trillion+ in unfunded liabilities that will start coming due with a vengeance in a couple of years. If we don't get our hands around this in a serious way very quickly, then we could be looking at hyperinflation.

Yeah. Happy Holidays....

Tom said...

I am a real estate agent here in Rockford. If you have good credit, loan money is easily available. Bargain-priced homes are everywhere.

If you ever have wanted to get into real estate, now is the time. It is a classic 'buy market'.

I was talking to an investment adviser yesterday who is of the opinion that we are headed for a period of inflation. He is an older guy who has sen a number of these swings.

Personally, I wonder if the deflationary phase is quite done yet. Money is still disappearing in great chunks as people realize that their assets really aren't worth nearly as much as they had thought they were.

I was living in Japan during the great bubble burst of the late '80s and early '90s. That took a good ten years to work out, and Japan is still not the power-house that it was.

Their government tried very low interest rates and lots of public building projects in vain efforts to stimulate the economy. Sounds familiar, doesn't it?

BeyondGreen said...

We seriously need to get on with becoming energy independent. Utilizing alternative energy sources would not only lessen our dependence on foreign oil it would create cheap, clean energy, as well as create millions of badly needed new green collar jobs. This past year the high cost of fuel seriously damaged our economy and society. It destroyed every imaginable budget from national to state to the local school. While some are foolish enough to be doing the happy dance around the lower prices at the pumps they are totally missing out on the news that OPEC is planning to cut production and raise the price per barrel back up to between 75-100 bucks again. I just read Jeff Wilson's new book The Manhattan Project of 2009 Energy Independence Now. you can see it @ It would cost the equivalent of 60 cents per gallon to charge and drive an electric vehicle. The electricity to charge the vehicle could come partially or totally from electricity generated by wind or solar. One of the most fascinating facts in the book is that ...If all gasoline cars, trucks, and suv’s instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. Why don't we use some of the billions in bail out money to bail us out of our dependence on foreign oil? We must move forward as nation towards energy independence. Oil is finite, it will run out one day in the not too distant future.

M. Simon said...

You don't become energy independent by paying 30¢ a KWh for electricity every one else buys at 10¢ a KWh.

Energy independence comes when alternatives to current sources come in at 9¢ a KWh.

And OPEC has a terrible record in holding up prices after a market crash. They all cheat each other to try to get an extra dollar of revenue.

If we were smart the money would be going into more research and not subsidies for uneconomical energy.

If you look at the solar cell market you will find that it is crashing because Spain can't afford the subsidies it was previously paying for PV electricity. And Spain was a significant part of the market.

Politics is a fools game for anything but research.

M. Simon said...

BTW there are no significant number of battery operated vehicles and even if production of PHEVs was 100% of the manufactured auto output it would take 15 years for 95% of fleet conversion.

On top of that - at 7¢ a
KWh with current PHEVs the equivalent gasoline costs are about $1.20 a gallon. At 22¢ at KWh it is $3.60 a gallon.

In another month or three gasoline will be very near or below $1.00 a gallon. The savings will have evaporated.

Add in that the PHEVs will cost $4,000 to $10,000 more than a straight gasoline job and the market will die. Except for those who don't care about such an expense. Such as the rich. Of course the rich always drag the rest of us along. Which is why we need to attract them to America instead of driving them away.

Again - more R&D is required to get the costs down.

And wind is nice. If we removed the subsidy costs would come down faster.

What this country needs is a 2 MV DC backbone for long distance transmission. And a policy of riding rough shod over the Greens who stand in the way.

Fat chance my Green friend, eh?

And how do we keep more $$ in the country until research produces the results we want? Drill baby, drill.

Fat chance my Green friend, eh?

The Greens - due to inherent stupidity and ignorance of economics are their own worst enemy.

BTW it makes no sense to hire Greens to produce $100,000 cars when perfectly satisfactory $35,000 cars are on the market.

The same goes for electricity or oil.

You might just as well hire some people to dig holes and other people to fill them in for all the real economic good it will do.

Did I mention that Greens are ignorant and stupid?

The only way to bring the economy around is to produce things people want to buy at prices they can afford. Supply side economics.

Production is the way out of our current problems. Fortunately we have a President coming in who is too stupid to understand that. Four years of recession and stagflation and he will be gone.

And in 2010 we will get a new Congress. Because the current one has too many ignorant stupids.

The only way out is to make government smaller.

Fat chance my Green friend, eh?

And the way to get entitlements under control is to means test them and then eliminate them.

Fat chance my Green friend, eh?

M. Simon said...

I had a look at the book reviews.

Pure bunk.

We have the same amount of proven reserves as we had 30 years ago. How is that possible?

Better extraction methods and oil companies don't go looking for oil unless it is profitable.

We will be living off the oil we found in the last 3 or 4 years for at least 20 years.

Then we will be hearing the same old peak oil crap we have been hearing for the last 100 years.

We do have to get off oil. However, the idea that we need to panic rush is stupid.