Oil Contrarian Sees Bubble Ready To Burst

[Ukridge]

Autofixer stated: "Remember the axiom: "Those you trade with you do not war with" (that can apply to economic war as well)."

I believe that your prognostications concerning the political interplay of China and Iran to be quite accurate. On the United thread I mentioned Professor Ash's recent scholarship on this topic. Even if the rate of industrialization in this sphere of the world slows remarkably, it still portends a significant shift in the center of gravity from the European/American position. It almost comes down to that irrespective of what the West does, events in Asia/India/Iran are overtaking it. Look at Iran's interest in a major natural gas deal with India and China. Would these two countries then be in a position to even wish to check Iran's nuclear ambitions when it is providing the amount of natural gas that is envisioned? There is a very subtle game being played out here. India has a long history of non-alignment and although its hat has been tipped toward the U.S. recently, it still has its regional interests and must account for its energy needs
I would however, take exception with your quote that I listed above. We need only to look at the Great War (I believe you call it World War 1) for example. The historical record is abundant that the involved parties were heavily intertwined with trade. In fact, many thinkers of the pre-war days were certain that this trade relationship would prevent hostilities from breaking out. Indeed there was the naval armaments race between Britain and Germany, but the overall trade among the different (later waring) nations was quite high. This of course makes one wonder of the oft trotted out palvum of "two democracies have never gone to war against each other." Apart from the question of when would they have needed to?, one also has to look at just how many true democracies there have been in the world heretofore. Switzerland is of course a true democracy while others have had representative bodies, constitutional monarchies, or various chambers of appointed or elected officials. In the Great War, Britain of course was a constitutional (and still is) monarchy as was (for the most part) Germany. I do not mean to be pedantic here, but I am just saying that those phrases of trade and democracy preventing war should be examined carefully. If a Western 'democratic' nation were really pushed to have its back against the wall it would be surprising against whom it went to war. I am only saying that I do not believe that democracy as a national system has been in full bloom long enough in the modern world to place too much stock in that phrase.
Cheers

 

[jimntx]

Look at Iran's interest in a major natural gas deal with India and China. Would these two countries then be in a position to even wish to check Iran's nuclear ambitions when it is providing the amount of natural gas that is envisioned? 

[post="262384"][/post]​

Even more to the point...
Why would China be inclined to check Iran's nuclear ambitions when there is continually emerging (though, granted, not necessarily conclusive) evidence that China is providing some/all of the materiels and technological expertise in support of those ambitions?

As you say, there is an interesting political game being played here--the ramifications of which are not completely clear at this point. From the end of WWII until the collapse of the Soviet Union, the two real players in the game were the U.S. and the Soviet Union. "If you give Israel, a slingshot, I shall give Jordan a bow and arrow."

Part of the game was nothing more than political one-upmanship. Another part was the belief on the part of both parties that some level of political instability in the world was to one's advantage to some extent. "We don't exactly want war, but then neither can we sell weapons and keep our defense contractors in business if there is world peace!"

We had the game covered because at the time, the U.S. and the Soviet Union were the only two world powers with the technology and the means of mass production of war materiels and the will. The countries of Western Europe had the first two components, but after several centuries of beating up on each other, they had lost the will to play the game because they had come to realize that it was, in fact, a zero sum game with no true winners.

The Soviet Union should have had the same cognizance of the game results, but Mother Russia seems to be incapable of learning from its unhappy past. When it fails at world/regional domination, it never seems to learn that domination is not a good/worthy/doable goal. It seems to garner the lesson that it must try harder next time. There are some indications that the U.S. is headed down the same misguided path, but that discussion is for another day. (I'm sorry. The devil made me throw that last sentence in there knowing full well that some of the more jingoistic posters on this board will get their knickers in a major twist. )

 

[diogenes]

Unfortunately, 'strategery' is not the US's strong suit.

I have always thought the British way of more-or-less permanent under-Secretaries a wiser political structure, than the US way of reshuffling departments deep down the bench, with each Administration change. Foreign policy needs continuity.

Here is the threat, once over the horizon, now imminent.

China has no wish for a head-to-head confrontation, economic or militarily, with the US - too expensive and costly. They understand patience.

They want enough hardware to be the regional military power, and impose their political wishes by intimidation, and enough to be problematic to the US. They want enough, so that when they can 'freeze' the US economically, they can intimidate Taiwan into submission.

Taiwan has long been a US-China bone of contention, and the long-term Chinese goal is to turn their side of the Pacific into their personal lake. You will then see, via economic means, the 21 century's version of a 'Co-Prosperity Sphere' , with the US on the outside, looking in.

China has no need of a head-to-head economic confrontation - they are hollowing out the US from within. They already own enough T-bills to cause the Administration to tread carefully. While we once allowed low-end production to be exported to China, we are now sending them high-end production and R&D. I know of no nation that has ever survived on consumption. With trade deficits as far as the eye can see, the US is being reduced to the role of junkie.

Insofar as India, I would suspect our recent, and unwise support of Pakistan has tipped the balance. Just this week, India has agreed to rapproachement with China. The official US position is that this is a good thing. I fear we are whistling past the graveyard. Furthermore, India is playing key role in absorbing American jobs and know-how.

I am amazed at the human capacity to rationalyze away axiomatic truthes. "Give a man a fish..., teach a man to fish...?" The US is throwing away their fishing skills. Marx had a flawed understanding of human nature, but I fear he was right with the idea that a businessman will sell you the rope to hang him.

You will note I refer to the US; not the West. At a time when Western cooperation would seem to be an imperative, the Administration has succeeded in isolating the US.

I am sure China and India have taken note.

 

[Ukridge]

Diogenes - I agree - particulary with your thought of China's patience. You have more or less made an accurate summation of Ash's thesis re China. You stated that "China has no need of a head-to-head economic confrontation." Unfortunately many who have only a passing view of this situation fall into a binary camp of "either/or." They see China wishing to make a play militarily and expect nothing less than outright agression. The truth as you have seen, is perhaps much more subtle. I am struggling at the moment to undestand those who state that China would NEVER "pull the plug" on the U.S. equities market. I, by dint of personality, am never so certain about such things. How can any observer of history so categorically dismiss such a possibility? Economists were certain that such a conflgration as the Great War could never break out because of the trade interlinks. What, for example, if China merely wishes to jolt the U.S.? There are many scenarios that could play out but again, I would agree that this is a very patient play on China's part. They are not looking for confrontation, but they do have goals and regional aspirations.
I was as well surpised with the sale (gift?) of military aircraft to Pakistan. India cannot countenance this lightly. Either there is something that is not known, or else this was a major mistake.
Cheers

 

[jimntx]

Diogenes has stated the parameters of the game quite well. As stated, China has the patience to play the game slowly and to the end. Comes from having a long, long history. As we in the U.S. rush from crisis to crisis thinking that the "sky is falling/end of the world is nigh/problem must be fixed right now/[pick one from Column A or one from Column B]", the older civilizations on this planet must be as amused as we are when we watch our children at play.

It reminds me of story (what doesn't at my age?)...

About 30 years ago, I was having a discussion with a friend of mine regarding the Arab-Israeli conflict. My friend was a Lebanese Christian whose family had left a successful business and a considerable fortune behind in Beirut in order to move to the U.S. and have some peace.

As I was pontificating about the (then current and immediate) parameters of the situation, my friend looked at me with a world-weary smile and said, "You Americans are such a young people. You can not seem to understand that this argument has been going on since before the Bible was written. If the story of Hagar is to be believed, all the current combatants are first cousins. They are squabbling over family land that is now too small to support the family, and the argument will not be settled until there is one Arab and one Jew left standing and one kills the other. THEN, and only then, will there be peace in Palestine."

A cynical view, perhaps, but closer to the truth that we care to admit, I fear.

 

[Ukridge]

This link from the Economist has a rather interesting perspective on the current oil price.

http://www.economist.com/agenda/displaySto...tory_id=3868421

 

[FWAAA]

This link from the Economist has a rather interesting perspective on the current oil price.

http://www.economist.com/agenda/displaySto...tory_id=3868421

[post="262426"][/post]​

That article is pure BS, since it doesn't simply blame Pres. Bush, Republicans or big bad oil companies.

 

[diogenes]

Thank you, jimntx and UKridge (nice April Fools on the UA board; you had me going for a bit! ).

Well, we know where WE stand.

An oblique angle on your binary notion, UK.

It seems that is what we colonialists have descended to, of late.

Everything is either/or, good/evil, for/against, black/white.

This is evident in popular entertainment, the media, and the pronouncements of our politicians.

This is a result of the impatience you speak of, jimntx, as well as an educational system that does not impart critical thinking skills, which have become exceedingly unpopular. The recent Attorney General labelled such thinking "unpatriotic" (Orwell, we knew ye well!!).

As a result, our leaders must be 'perfect' (the right and left have different views of perfection), and if the leader deviates a whit from the orthodoxy, he is no damned good. Alas, the world is more complex than that.

It seems to me if you reduce the variables to two, the equation becomes simple to solve, but the margin of error becomes great. Isn't that why they invented calculus?

 

[autofixer]

I am trying to recall my history concerning the "Great War" (The local monuments to the event call it the Great War here in my home town.) and the causes and effects. I think it was the first war of the industrial era and modern trading blocks were not yet established. It was still a time of archdukes and kings.

Each war after the "Great War" were the result of the resistance to globalization. The facists in Spain were resistant, in Italy and in Germany. The Soviets were resistant as are the Islamofacists of today.

Globalization is on the march and China, India, Brazil and even Eastern Africa are picking up the banner and charging the hill. Western Europe and North America are stagnant and are beginning to think likewise.

We in the West should seriously be looking for alternatives to fossil fuels. Not for some autruistic reason, however, for purely economic reasons. China will tap the oil resources needed to drive their economic engine-as the West found coal then oil to drive theirs some 150 years ago. China will be the driving force, with respect to the price of oil for the rest of our life times.

 

[diogenes]

The talking heads would have one believe globalization is a law of nature, like gravity. And that it occurs and multiplies, untouched by human hands.

Globalization bends human production to the wheel of the corporation, as opposed to the traditional nation-state.

The arguments for are efficiency, and the reduction of nationalist passions.

Let us stipulate to efficiency for brevity's sake now, and examine the reduction of the passions.

I find it inconsistent, to say the least, that hard-headed businessmen now subscribe to the perfectibility of man, traditional liberal territory. I contend that whatever social construct you place humans in - church, military, government or global corporation - they will remain, human. Driven by the same ego, greed, and limbic system as before.Salvation thru more and better corporations? I think not.

The talking heads would also have you believe globalization is happening, and should happen, separate from the governance of the nation. Hmmmm, my Constitution reads differently. Article I, section 8 plainly says the Congress shall "regulate Commerce with foreign Nations, and among the several States..." . The degree of regulation is not up to the corporation; it is up to the sovereign people, thru their representatives. One suspects the radical conservatives of the Robertson/DeLay persuasion would not want this part of the Constitution strictly constructed.

 

[High Iron]

Very astute diogenes.

This astuteness stands out though due to apathy of most too absorbed with small potatoes to connect the dots.

The talking heads would have one believe globalization is a law of nature, like gravity. And that it occurs and multiplies, untouched by human hands.

Globalization bends human production to the wheel of the corporation, as opposed to the traditional nation-state.

I've always fumed at how the "talking heads" get away with such glibness regarding "globalization". ( I put the term in quotes to highlight the use of the term as a phenomena ) For such an ostensibly ( to hear them tell it ) naturally occurring unstoppable economic viccissitude, there sure seems to be enough lobbying/arm-twisting/political wrangling to keep it on life-support. Notice the shrill strawman overraction as the supporters ( and cheif beneficiaries ) damn near freak out over any attempt at questioning their methods as they immediately tag any sceptics as isolationists etc.


The whole phenomena angle is just a feel-good dodge of the real issue. It's all the rage....zeitgeist if you will. Notice how we've accepted over the years tagging just plain old rude inconsiderate selfish behavior behind the wheel as "road rage", as if the phenomena angle transcended just acting like an ass.

When they say it's too late to put the genie back in the bottle, what they're really saying is "pay no attention to the man behind the curtain".

 

[diogenes]

Thank you, high iron.

The only credible-appearing talking heads the transnationally owned media will put on are pro- globalization - Freidman, Russert, Matthews, et al.

The only ones they put up who put the matter to the question look geeky, or a certifiable nut-job.

A fine example of this was NAFTA. A bevy of pro-NAFTA forces were trotted out, and the only anti's were Perot and Buchanan - a nut job and a Brown Shirt.

Gephardt did a well thought-out talk on the downside of NAFTA that I caught on CSPAN at some ungodly hour. Once. I didn't see him again in any media for another two weeks.

 

[BoeingBoy]

Abbreviated weekly petroleum status report.....

Since my schedule takes me out on Wednesday's this month, I assume that everyone who's interested knows what's happened to crude prices and at least the major points in the EIA's 'Weekly Petroleum Status Report'. Consequently, I'll stick to the jet fuel portion of the report, since it's not widely reported....

For the week ending April 8th, jet fuel spot prices declined after reaching a peak on Friday 4/1/05. The following are the peak spot prices (per gallon) followed by the weeks ending spot prices (4/8/05):

NY Harbor $1.7510 $1.5705
Gulf Coast $1.7385 $1.5618
Los Angeles $1.9238 $1.7900

To give context to these, here are the spot prices for crude (per barrel) on 4/8/05, followed by this past Friday's (4/15/05) close:

WTI-Cushing $53.46 $50.49
Brent $51.83 $49.70

The spread between jet fuel and WTI-Cushing crude spot prices has been running a little over 30 cents per gallon (higher for LA delivery and lower for NY Harbor and Gulf Coast). Assuming that remained the same this past week, that would mean the average of the 3 jet fuel spot prices would be about $1.52 per gallon - again, higher for LA delivery and lower for NY or Gulf Coast delivery (I presume the bulk of our fuel purchases are based on eastern US delivery).

----------

Now, by popular (?) demand, my thoughts on the recent decline in crude prices. I'm not going to take the time or expend the energy to construct a timeline with data points showing what happened when, but here are some of those "inaccurate" fundamentals that affected crude oil prices in the last few weeks:

1 - successive EIA weekly reports showing growing domestic stockpiles of crude oil as well as growing stockpiles of gasoline.

"U.S. crude oil inventories rose to 320.7 million barrels last week, the highest since June 2002, the Energy Department said. Gasoline stockpiles increased 848,000 barrels to 213 million."

2 - an IEA report forecasting lower growth in the world-wide demand for crude oil (particularily China) and indicating that there are signs that recent high prices are slowing consumption of refined products.

"Oil demand growth is slowing in China, the second-largest consumer, the agency said today. Increased OPEC production and higher global inventories also should help lower prices, according to the agency, which advises 26 industrialized nations on energy policy."

3 - Reports that OPEC actually increased production following the last meeting in March.

4 - a report that a drilling project in the Far East will begin production much earlier than anticipated (September 05 vs 2006).

--------

Now maybe a certain someone will be so kind as to explain why his short-term forecast for oil prices made on March 11 (declining crude prices in advance of March's OPEC meeting) was wrong and why his later long term forecast made on April 13th (increasing crude prices will increase) is wrong so far.

Jim

 

[USA320Pilot]

BoeingBoy:

I believe your Fundamental Analysis review of past trading and your market action review was well done.

However, I believe you should take a Technical and Sentiment Analysis course and then you would better understand more about market dynamics and security price action. I’m not a market timer when I trade, especially a NYMEX crude oil market timer considering the commodities volatility or during electronic trading hours. I prefer to technically swing trade other commodities, where the profit potential is greater for the individual trader.

I believe you purposely twisted my comments to try to discredit me, however, the issue is simple. I believed crude oil at $58 per barrel was overbought in the near-term (and I indicated so) and would sell off, which it did. But over time the commodity price (along with others) will climb, which is what I indicated before. Some of this will be due to inflation and some due to fundamentals.

No security goes straight up or straight down and every trading firm looks at the technicals and sentiment.

Regardless, the good news is crude oil and jet fuel prices are falling.

Keep up the good fundamental analysis and review. Separately, can you give us a crude oil price target in the near and long-term?

Regards,

USA320Pilot

P.S. Since electronic trading opened back up tonight, crude oil is down another 41 cents to $50.08.

 

[BoeingBoy]

I believe you purposely twisted my comments to try to discredit me, however, the issue is simple. I believed crude oil at $58 per barrel was overbought in the near-term (and I indicated so) and would sell off, which it did. But over time the commodity price (along with others) will climb, which is what I indicated before. Some of this will be due to inflation and some due to fundamentals.

[post="262821"][/post]​

Selective memory, maybe? On March 11 (in the wee hours of the morning) you said that crude prices would trend downward in advance of the following weeks OPEC meeting. Since neither spot or futures contracts were close to $58/bbl at that time, I find your justification for making that prediction lacking. Both spot and futures trended upward before, during, and after the OPEC meeting, reaching their peaks about April 1 (reaching that $58/bbl you use to justify your March 11 prediction).

As for the long term trend, on March 11 you predicted that crude would "stabilize around $45 per barrel" but on April 13 you predicted that "commodity prices will climb" over time (which I tend to agree with BTW). I can definitely see that conditions change - even the experts don't have perfect foresight - yet somehow you claim that both were correct. A simple "fundamentals have changed so I'm changing my prediction" would be an improvement (that doesn't even have the word "wrong" in it).

Separately, can you give us a crude oil price target in the near and long-term?

[post="262821"][/post]​

Nope. I've never claimed to have a clue what crude will do in the future, short or long-term. My "guess" is that prices will increase over the long term, though events could affect how much or even if that becomes reality.

Additionally, my interest in crude prices is only peripheral. What is of more interest as it relates to the company is jet fuel prices, which are affected by several factors with crude prices being among them.

However, being overly focused on crude spot or futures prices misses a lot - primarily refining capacity and what happens to affect it, the actual price of crude at the refinery (not an insignificant amount lower than widely reported spot prices), refinery overhead (increasing over time), etc.

Respectfully

Jim