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Prominent Think Tank Says Oil Supply Crunch Coming

Think high crude oil prices are history? Maybe not. In fact, one prominent European think tank is forecasting $200 a barrel within the next few years. From the BBC News (UK) website Friday:

A serious oil supply crisis is looming, which could push prices above $200 a barrel, a think tank has warned.

A “supply crunch” will affect the world market within the next five to 10 years, the Chatham House report said.

While there is plenty of oil in the ground, companies and governments were failing to invest enough to ensure production, it added.

Only a collapse in demand can stave off the looming crisis, report author Professor Paul Stevens said.

“In reality, the only possibility of avoiding such a crunch appears to be if a major recession reduces demand - and even then such an outcome may only postpone the problem,” he said in The Coming Oil Supply Crunch.

Professor Stevens, who is the Senior Research Fellow, Energy, Environment and Development Programme, at Chatham House, added:

While the forecast is controversial and extremely bullish, even allowing for some increase in capacity over the next few years, a supply crunch appears likely around 2013.

Source:

“Oil ‘could hit $200 within years’”
BBC News (UK), August 8, 2008

Wall Street Takes A Vacation (From Reality)

From the Wall Street Journal’s MarketBeat Blog this afternoon:

With the Federal Reserve meeting out of the way, along with most of the important earnings reports, many participants are ready to take a bit of time for vacation, and they leave with a smile on their face after the dollar rebounded, oil prices slumped, and the Dow industrials put together a 300-point rally to close out the week. All major indexes gained at least 2%, led by the chipmakers, banks, retailers and cyclical stocks.

The following saying by Mark Twain comes to mind:

All you need in this life is ignorance and confidence; then success is sure.

Enjoy your time off, Wall Streeters. Methinks there will be hell to pay in future days.

Talking Heads, “Road To Nowhere” (1985)
YouTube Video Link

Source:

“Four at Four: No Worries”
David Gaffen
Wall Street Journal (MarketBeat Blog), August 8, 2008

Windfall Profits Tax? Where’s The Windfall?

Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.

“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.

Does anyone still pay attention to this guy? IndyMac. Lest we forget!

Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.

Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.

A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?

Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:

TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.

Okay. Enough of this foolishness.

…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?

Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):

Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.

Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…

The Journal summed it up best when it stated:

…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It’s what politicians do in Venezuela, not in a free country.

Sources:

“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008

“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008

“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008

“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008

When All Else Fails, Re-Invent The Economics

I know CNBC has the reputation of being a cheerleader for stocks, but really now. The following appeared on the CNBC website this morning:

U.S. crude oil inventories fell much more than expected last week, keeping downward pressure on already weak oil prices.

Crude inventories fell by 1.6 million barrels for the week ended July 19, the Energy Information Administration reported… On average, analysts were predicting crude inventories to have fallen by 700,000 barrels.

So, when did declining supply ever put “downward pressure” on the price of oil, or any other commodity?

To be fair, I can’t directly fault CNBC for this. Their source for the material was Reuters.

Probably just a typo then, right. Right?

Source:

“Oil Hovers Near $126 after Big Drop in Crude Inventories”
CNBC/Reuters, July 23, 2008

How Politicians Make Themselves Look Stupid, Part 2

Yesterday, I noted in part 1 that Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” Tuesday morning to scare off crude oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices.

CNN Money picked up on the findings, which you can watch here. The segment lasts 1 minute 46 seconds.

Source:

“CFTC: No oil market manipulation”
Video
CNN Money, July 23, 2008

Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

How Politicians Make Themselves Look Stupid

Earlier today, CNN Money’s Scott Anderson wrote about new legislation introduced by Senate Democrats that is meant to “crack down” on oil speculators, who they claim are responsible for high crude oil prices. The bill, known as the “Stop Excessive Speculation Act,” is sponsored by Senator Byron Dorgan (D-ND) and Senate Majority Leader Harry Reid (D-NV), along with other Democrats. According to Anderson:

It would provide more resources and authority to the Commodities Futures Trading Commission to detect and punish speculation, stop speculators from using foreign markets to manipulate the price of oil in the United States, require more transparency in oil markets and limit the trading of market players who do not intend to take delivery of the oil they purchase.

In particular, the bill will give the CFTC greater power to regulate the “swap” market for futures and differentiate between “legitimate” and “illegitimate” hedge trading that, the Democrats say, has lead to increased prices.

Well, a test vote on the legislation took place today, with the result being 94-0 in favor of. At this point, it’s not clear when a final vote would take place. Senator Dorgan remarked:

First things first. If you are running a race with hurdles, jump the first hurdle first. The reason we have oil at $130, $140, $145 a barrel - like a roman candle going up, up, up - is because we have excessive, relentless speculation in these markets… Nothing in supply and demand in the last year justifies the price of oil.

Now, here’s where it gets funny…

From the Associated Press Tuesday afternoon:

A federal task force set up to examine the sharp run-up in oil prices says in an interim report that fundamental supply-and-demand factors are most likely to blame…

The Interagency Task Force on Commodity Markets, chaired by the Commodity Futures Trading Commission, was formed last month to examine investment practices and fundamental market factors.

I recall something that Jim Puplava said this past weekend on his show “Financial Sense Newshour.” He said:

We’re posturing here, rather than dealing, and that’s why we’re going to be heading into a crisis. Instead of trying to solve the crisis, it’s like Matt [Simmons] said- they’re on a witch hunt. You’ve seen it. They’ve tried to blame it on the weather, the war, the dollar, the oil companies, and now, the latest witch hunt is speculators. And, instead of solving the problem, they’re just making the problem worse, which is why we see a full-blown crisis in the year ahead.

Maybe Congress should focus on something they’re good at, like conducting hearings on steroids in Major League Baseball…

Sources:

“Democrats: Crackdown on oil speculators”
Scott Anderson
CNN Money, July 22, 2008

“Fundamentals led to $130 oil – report”
Associated Press, July 22, 2008

Financial Sense Newshour
3rd Hour, Part 1
FinancialSense.com, July 19, 2008

Weekend Videos

Just got back to blogging late Friday evening. Had to entertain my relatives from Canada who are in. Like the Irish a couple of weeks ago, they shopped liked it was Christmas in July to take advantage of the weaker dollar. I know one thing for sure. Foreigners sure love our “strong dollar” policy…

“Oil Crisis”
Becky Quick
CNBC, July 18, 2008

From the CNBC website:

The House may vote on releasing oil from the strategic petroleum reserve, with Senate Majority Leader Harry Reid and CNBC’s Becky Quick.

You can view the 3 minute 18 second video here.

Note to Congress- there is no quick-fix for the energy crisis. I’m starting to consider donating funds to Jim Puplava’s proposed program, “No Congressman Left Behind.”

Apparently, it’s a non-issue now anyway, seeing that after oil prices suffered their biggest weekly drop ever, Yahoo! Finance asks tonight, “So is it time to declare the energy bubble popped?” By the way, the Associated Press is reporting that terrorists are trying to enter the United States with European Union passports. Good thing Congress wants to deplete oil stockpiles meant for a national emergency. Like a major terrorist attack, for example. If you think 9/11 was a one-off event, I have a bridge that spans the East River out in NYC that I can sell you for a really good price…

“Is government clueless about economy”
Jim Jubak
MSN Money, July 18, 2008

From the MSN Money website:

Washington is talking us into a deeper crisis. Neither the President nor Congress gets it: When you owe as much as the US does, keeping your overseas creditors happy is the most important thing, says Jim Jubak.

You can view the 4 minute 7 second video here.

Jubak said in the segment:

The Saudi government has gone into serious discussions about taking its currency off the dollar peg.

“Christmas In July”
The Dandy Warhols, “Little Drummer Boy” (1995)
YouTube Video Link

Playing The Markets? Caution Is The Name Of The Game

Caution is not cowardly. Carelessness is not courage.

-Unknown

Here’s one for the traders and investors out there. I came across the following list of reasons yesterday from Bennet Sedacca (with Professor Rob Roy) of the financial website Minyanville.com as to why caution is a must in the markets these days:

1. Stocks are firmly in a downtrend.
2. Corporate spreads are rapidly widening.
3. Everyone I know is saying “All is well, buy America.”
4. European equities are taking out the lows of the year.
5. The capital-raising window is closed.
6. Earnings estimates are too high.
7. While much of the move in financials is done, it should spread to other industries.
8. If the “best of breed” are missing their numbers, what happens to the real dogs?
9. We are entering the worst part of the Presidential cycle.
10. We are at war. On multiple fronts.
11. The consumer is tapped out.
12. Corporate buybacks are gone.
13. Net equity issuance is very high.
14. Oil above $100 is very bearish.
15. The savings rate is 0.
16. The U.S. is actually one of the best performing markets in the world this year.
18. Level III assets continue to grow.
19. “Credit rot” is spreading from sub-prime to prime.
20. The dollar is sinking to new lows.
21. The Federal Reserve’s balance sheet is impaired.
22. Mutual fund equity cash remains low.
23. Individual investors are now taking money from their retirement accounts to survive.
24. The market is technically on the verge of breaking down.
25. We’ve broken the 200-week moving average in the Dow Jones for the first time since 2003.

Sedacca and Roy explained each reason in detail, and offered this advice:

Risks remain high and, as always, being cautious will only lose you opportunity - not capital.

Source:

“25 Reasons To Remain Cautious”
Bennet Sedacca, Professor Rob Roy
Minyanville.com, July 1, 2008

How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

Peter Schiff TV Appearances

Peter Schiff, author of the book Crash Proof: How to Profit from the Coming Economic Collapse, appeared on FOX News Saturday morning and CNBC Tuesday morning. Schiff told viewers of “Fox Bulls & Bears” that the downturn in the U.S. economy goes beyond a “slowdown.” He warned:

We’re already in a severe recession, and it’s going to get a lot worse.

Commenting on the poor performance of the U.S. stock market lately, the president of Connecticut-based Euro Pacific Capital said:

This is a bear market. We’ve been in a bear market since 2000. The market’s going a lot lower, not only in nominal terms, but in real terms.

Later on in the show, Schiff gave a timeframe for how long he thought the bear market would last. He told viewers:

We are in a secular bear market. It’s been going on for 8 years. It’s going to go on for another 5 to 10 years.

As to where investors may want to look at putting their money, the host of the weekly radio program “Wall Street Unspun” said:

It’s [oil] probably going up to $150…

And, you know, trying to catch a falling knife in the financials? They have a long way to go down. I wouldn’t touch them…

Look at gold. You want to see a good chart, look at commodities. Look at foreign currencies.

At the conclusion of the show, Schiff predicted:

Well, this week Bernanke said the economy was going to improve and inflation was going to moderate. He was wrong on both counts. The economy is going to get a lot worse. Inflation is going to get worse. And you’ve got to get out of the dollar. It’s going to fall at least another 10%.

FOX News Appearance
YouTube Video Link

On Tuesday morning, Peter Schiff appeared on CNBC’s “Squawk Box,” and responded when asked who was responsible for the financial mess the United States has found itself in by saying:

Well, first of all, it’s the government, and when I say the government, I also mean the Federal Reserve, that has artificially kept interest rates much too low in this country, and in so doing, they’ve encouraged a culture of consumption, of borrowing to buy things. In America, we borrow to buy houses, to buy cars, to send our kids to school, to remodel our houses, to take vacations. And what we’re seeing right now is the fact that we can’t pay any of this money back. And the lenders are cutting us off, and this whole bubble economy that we have is now deflating. But it never would have existed if we had honest money. If we were on a gold standard and we had higher interest rates, we would have been saving, we would have been producing, and we wouldn’t be in this mess.

Schiff shared his views about how to avoid a financial armageddon. He said:

We need to raise interest rates dramatically. What’s that going to do? It’s probably going to bankrupt most of the financials. It’s going to bankrupt a lot companies. We’re going to have to go through a big retrenchment because we basically spent ourselves into bankruptcy. But we can’t keep trying to reflate the bubble. That’s what the Fed is doing. That’s what the stimulus is trying to do. They’re trying to get us to spend more money. That’s the problem. We’ve spent too much. So, we’re going to have to live through a severe recession. If we keep fighting it, all we’re going to have is higher inflation, higher oil prices, higher commodity prices, and eventually, we’re going to get something far worse than just a severe recession. We could have hyperinflation and a complete destruction of our currency.

You can access the 7 minute 16 second CNBC segment here.

Sources:

“Fox Bulls & Bears”
FOXNews, June 28, 2008

“Squawk Box”
CNBC, July 1, 2008

RBS Predicts Stock, Credit Market Crash

Wanted to bring up the following story earlier, but unfortunately I was out of town for a few days. Better late than never, I always say. From CNBC on June 18:

The Royal Bank of Scotland issued a stark warning to investors Wednesday, stating global stock and credit markets could be on the verge of a fully-fledged crash as central banks have their hands tied by soaring inflation, the Telegraph reported.

“A very nasty period is soon to be upon us - be prepared,” Bob Janjuah, credit strategist at RBS, told the UK daily paper.

The S&P 500 index is likely to slump by more than 300 points by September, according to a report from the bank’s research team, as “all the chickens come home to roost” from over-easy lending practices and other excesses of the global boom period, the report quoted by the Telegraph said.

“I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names. Cash is the key safe haven. This is about not losing your money, and not losing your job,” Mr Janjuah told the paper.

RBS expects US stocks to continue to gain until early July before the effects of the oil spike start to drag on momentum, the Telegraph said.

“A very nasty period is soon to be upon us”

Source:

“RBS Warns of Stock, Credit Market Crash: Report”
CNBC, June 18, 2008

More To High Price Of Oil Than Just Speculation?

Turn on the TV, surf the web, or read the paper, and you’ll almost certainly encounter someone screaming that the price of oil has skyrocketed because of speculators. “Speculation! Manipulation! Greedy bastards!” they yell. Granted, that could be a part of it (I guess the CFTC will find out, won’t they?). But, whatever happened to that fundamental economic concept of supply and demand, and how it applies to “black gold”? I rarely hear anyone mentioning it (T. Boone Pickens, Jr., excluded). Which is a shame, because maybe, just maybe, it might play an important role behind the high cost of crude oil these days. Bloomberg reported Wednesday:

Global oil production fell for the first time in five years in 2007 and reserves also declined as prices rose to records, BP Plc said in its annual Statistical Review of World Energy.

Crude oil production dropped 0.2 percent to 81.533 million barrels a day last year, from 81.659 million barrels a day in 2006, the London-based company said today. Proved reserves were 1,237.9 billion barrels at the end of last year, compared with a revised total of 1,239.5 billion barrels for 2006.

The financial news service added that the North Sea and Mexico are both seeing “flagging supply” as well. Bloomberg’s Eduard Gismatullin also noted:

Global oil consumption rose 1.1 percent to 85.22 million barrels a day last year, BP’s review said.

Let’s see. Supply at 81.533 million barrels a day. Demand at 85.22 million barrels a day. Giving us a shortage of 3.687 million barrels a day in 2007. Compare this to a daily shortage of 2.571 million barrels in 2006 and 2.062 million barrels in 2005, and a growing gap between supply and demand becomes apparent— which could help explain higher oil prices. So the next time someone screams “it’s all the speculators fault” when it comes to oil prices, ask them if supply-and-demand has anything to do with it. It will be interesting to see how they respond.

Sources:

“Global Crude Oil Production Dropped in 2007, BP Says (Update1)”
Eduard Gismatullin
Bloomberg, June 11, 2008

Oil Production Table- Barrels Per Day”
BP.com

Oil Consumption Table- Barrels Per Day
BP.com

Goldman Sachs, Morgan Stanley Predict $150 Oil This Summer

First, it was legendary oilman Boone Pickens who uttered the obscenity. Now, Goldman Sachs and Morgan Stanley have joined in the chant. Reuters reported today that according to Jeffrey Currie, the global head of commodities research at Goldman Sachs, the price of crude oil is likely to reach $150 a barrel this summer as tighter supplies outweigh weakening demand. Currie told attendees at an oil and gas conference in Kuala Lumpur, Malaysia:

I would suggest that the likelihood of that happening sooner has increased tremendously… sometime in summer.

He added:

Demand for oil is weak but supplies are even weaker.

According to Reuters:

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago — a once unthinkable level — said last month oil could shoot up to $200 within the next two years as part of a “super spike.”

Last Friday, Morgan Stanley also predicted that the price of crude may reach $150 by July 4 due to significant demand from Asia along with falling inventories.

Source:

“Oil Is Likely to Hit $150 This Summer”
Reuters, June 9, 2008