Wednesday, January 05, 2011

Blowing Bubbles in Oil, Commodities?

Right now, the printing of trillions of dollars by the Federal Reserve is creating another financial bubble. It is supported only by deficit spending, borrowing, and money-printing. Nothing else is supporting the stock or bond market. Everyone knowledgeable person knows this, but many who are benefitting from the scam choose to deny it. The intent of this bubble is, obviously, to provide cheap capital to the biggest debtors in the world, and to juice stock and bond prices. That helps those who are have obligations and assets created during the previous bubble that went out of control, because it is allowing them to escape before the system blows up, one final time. Meanwhile, many non-connected financial institutions and individual investors are being conned into buying into the bubble through the extensive Orwellian Newspeak that we hear on radio, television and in the business press.

No bubble expands forever. The balloon must eventually pop if too much air is pumped in. The same is true of a financial bubble. If the Federal Reserve keeps pumping funny-money dollars into the current bubble, it will continue to expand for a while, until it finally pops into hyperinflation. On the other hand, if the Federal Reserve stops pumping in the dollars, the balloon will deflate quickly. We may end up in a Greater Depression, but coupled with inflated prices because of what was done. _SeekingAlpha

Commodities have rallied across the board, and large numbers of insitutional investors are betting that the rally will continue through the next several years.

One of the commodity prices followed closely by energy analysts is the price of crude oil. Recent surges in oil prices have prompted many analysts to predict oil prices between US $100 and US $150 a barrel over the next year or two. But is that a sure bet?
Oil bulls risk mistaking tax-driven changes in crude inventories and a temporary rise in heating demand for a lasting transformation in the outlook.

The recent rally, which has seen spot oil prices rise almost $20 (28 per cent) since August 2010, has been driven more by expectations about future tightness than current fundamentals.

Market participants are convinced strong demand growth in emerging markets, coupled with recovery in the United States, cheap money policies and Saudi Arabia's refusal to raise output, will work down excess inventories and tighten the supply-demand balance in 2011.

But inventories of crude and refined products remain comfortably above five-year averages. Saudi Arabia and other OPEC members hold 5 million barrels per day (bpd) of spare capacity. Non-OPEC production is growing briskly. Refiners have plenty of spare capacity. And there is a good balance between product demand and available crude oil inputs. _CalgaryHerald

If institutional investors catch wind of a deflating bull bubble-stink, prices could fall abrubply.
Crude may decline to as low as $82 or $80 a barrel if hedge funds and other speculators decide to take profits by selling contracts, Petromatrix’s Managing Director Olivier Jakob said in the report. It last traded at $88.52 a barrel in New York as of 12:22 p.m. London time.

“If there is some genuine profit taking from large speculators then we need to consider the risk for further downside,” Jakob said. _Bloomberg

Oil dictatorships like Russia, Venezuela, and Iran tend to be particularly belligerent when oil prices are high -- and are expected to go even higher.

Big investors who help to drive oil prices higher than fundamentals could do, are also feeding political instability and despotism in the third world, and economic uncertainty in their home countries. The smart ones are able to profit from such uncertain and instable conditions, if they move fast enough on the shifts.

The Obama administration has taken a lot of steps to shut down US production of coal and oil. Obama's EPA is working to clamp down on Canadian oil sand imports and on US production of shale oil. But political peak oil -- and the resulting artificial oil price bubble -- a la Obama will not affect the US' neighbors.

Cuba is diving into the offshore oil drilling game -- hoping to cash in on Obama's ongoing de facto Gulf of Mexico oil moratorium. Cutting corners on safety and environmental protections, Cuba's Venezuelan, Spanish, Norwegian, Brazilian, Indian, and Chinese partners are not particularly concerned about the environmental fallout along the Eastern US coast and fisheries, in the event of a massive spill. Certainly Mr. Obama is not likely to complain very loudly -- even if the environmental damage from a Cuban spill is orders of magnitude larger than from the BP spill. In the event of a Cuban spill, Obama is likely to turn against US oil companies to make it even harder for them to drill in US offshore areas.

Politically contrived bubbles in commodity prices abound. Bubbles within bubbles. And although human stupidity may be forever, individual bubbles always burst.

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Blogger Unknown said...

but it's different this time...

2:45 PM  

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