BeachBum, here is another e-mail from James Smith of PEI.
He discusses the also how much storage costs, not in ships but in SPR.
best, Seppo
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In this week's issue of Barron's there's an interesting
article on oil by Cheryl Strauss Einhorn:
, "Coming: $40-a-Barrel Oil?" (See pg MW18)
Quoting from this article,
"In the early 1990s, the world could store 20
days of oil supplies. Now, global capacity is
only 10 days, and with the current supply
shortage, the world has much less than
that put away."
And because there are few places to
store this oil, , "Refiners will now either have to
stop taking foreign crude or
store Uncle Sam's" says Einhorn.
Quite a ridiculous situation, but we all
know why this is being done before Nov 6th.
The govt is making a huge mistake in
targeting the price of oil. By tapping into
the SPR based on price rather than a
"Supply Shock", it presumes that the govt
knows at what price oil is cheap and at
what price oil is expensive. But do they?
A govt study not long ago projected that
the cost of oil would stay around $24/bbl
going out 20 years!!!
What if they're wrong? Actually,
they are already wrong.
We believe that oil will be trading at
$60-80 range in the next few years.
Looking back at the Fall 2000, a couple
of years from now, most people will
realize that the govt should NOT have
been reducing the SPR.....in fact...the
govt should have been adding to it
all along.
If the govt knew what they were
doing, they should have tripled the
size of the SPR back when oil was
$10/bbl two years ago. 600 Million bbls is only
30 days supply. If things really get
dicey in the MidEast wouldn't it be
better to have 90 days supply in
reserve? Is the govt saying that
an interruption in oil supplies due
to a MidEast conflict cannot last
more than 30 days????
Last week I brought up the point
that it costs money to store oil. The
real danger is that as the govt
sets a precedent that they will intervene
every time the price of oil moves
towards $40---by dipping further into
the SPR---it sends a signal to oil
companies that they don't need to
store oil. The govt can do it for them
and it costs the oil companies nothing.
As I pointed out before, it costs money to store oil.
Why should oil companies store oil
at high cost to themselves if they can
fall back on the govt every time oil
goes up in price?
Einhorn raises a similar point
in pointing out the backwardation
in oil (supplies for current
delivery are more expensive
than those for future delivery).
Under these conditions, storing
oil now and selling it later is
a losing proposition.
In fact the farther out the contract
the cheaper the price of oil. What
does this mean?
Why the backwardation?
It means that the market still
does not believe that oil is in a bull
market. Once the major participants
in the oil market truly believe in
higher oil, you will see that
backwardation disappear. (In
a normal market the far out months
should be priced more expensive to
the nearterm months).
Ironically, once everyone is convinced
that oil is going nowhere but higher
---thus pricing futures delivery months
at a sharp premium to near months---
that is precisely when you are likely
to see an intermediate-term high for
oil. Til such time as the backwardation
disappears I'm convinced that oil is
headed ever higher. Our work suggests
that 2002 will be especially crazy for
the oil markets. Something to look
forward to....if you are a member of OPEC.
Clinton will go down in history for a
lot of things he'd rather forget, but this
one is likely to have a more lasting
impact. Jeopardising US National
Security for short-term political gain,
is not going to sit well with historians.
Historians will note that although Clinton
did not cause the coming war in the
MidEast, he certainly left America
ill-prepared to respond to it.
Many people falsely accuse the
Clinton/Gore administration of not
having an oil policy. That in fact
is not true. Their policy with regards
to oil is to do everything within their
powers to reduce our national security,
leaving the next President with very
few options in an emergency.
Again the US should have a 90 day
supply of oil on hand, not 30 days, and
certainly not less than 30 days as
the Clinton/Gore administration
is now implementing.
What makes this situation worse is that
many other nations are now actively
discussing the idea of copying the US,
by dipping into their own reserves.
This will only put more nations at risk.
Saddam can afford to sit back and
pick his moment to stop production.
Some analysts have suggested a
move to $50 if Saddam were to withhold
production going into Winter. I rather
doubt that a move that high can be
solely caused by Saddam unless
he simultaneously starts another
conflict with Kuwait. Not something
that can ever be ruled out. But if
he stops production, could we see
a quick move to $40....that would be
quite reasonable.
Even if you are a big believer in the
MidEast Peace Talks, does that mean
you should not prepare for the worst.
Clinton got elected in 1992 using a catchy
phrase,
"Its the economy, stupid."
Historians will retort:
"No, it's your foreign policy, stupid!"
A vital element in foreign policy
includes preparing for a war that
no one wishes will come. That
includes maintaining an adequate
amount of oil in strategic reserve.
How Oil Relates to Stocks and Bonds
Some have wondered whether
stocks have seen their Lows.
Afterall the Nasdaq did sell off
10% going into Mid-September.
Is it possible that we have seen
the lows for stocks and that we
can all be "happy campers" again?
I truly doubt it. Nothing can ever
be ruled out with the markets, but
those of you who have studied our
models in detail will know that we
don't rely solely on Timing Models.
We filter our Timing Models thru
our Pricing Models. The main
pricing model we using is the Reversal
System. To confirm that the market
can move to New Highs, the market
needs to achieve certain threshold
levels on a closing basis.
See our daily reports to confirm these
key levels.
Is it possible that bonds responded
better to the Economic Confidence
Model Turning Point than stocks.
Yes, it appears so, but this does
not mean stocks are not still due
for some rough weather ahead.
My attention is drawn to the fact that
the Utility index peaked precisely
on September 13th. Bonds peaked
on September 1st, but did not accelerate
in their move downwards until September
14th.
Many of you are familiar with our concept
of a "Directional Change." This is not the
same thing as a Turning Point. In many
ways a DC is more valuable than a TP.
Markets normally move higher til they form
a top, then they move sideways before
accelerating downwards. It is that
point in time at which a market accelerates
in the opposite direction (some time after
for a high or low) that we call Directional
Change.
Sept 14th on bonds is what we would classify as a
Directional Change. It wasn't the High, but
it did give us a momentum change in trend,
or what we call "Directional Change."
What I'm saying is that we must consider
the idea that bonds may have just planted
an important intermediate-term high here
in September.
Again our reports are never one-sided. We
will always tell you in our daily reports where
you should consider the potential for New Highs.
If bonds were to close above a key bullish reversal,
it would suggest a move to New Highs (See our
daily report on bonds to confirm the key levels).
Til then, we believe bonds are likely headed lower.
Its interesting to see how markets relate each other.
Central Bank intervention last week to help the EURO
came as a surprise. Many analysts felt the US would
not participate, but did. Still, many now wonder how
much longer the US will stay on the "intervention team"
especially since a stronger Euro could very well
undermine US stocks and bonds. Huge amounts of
European capital has found a home in US assets in just the last 6-12
months. Much of this European capital is not going to go back to
Europe
because Europeans have been on a buying
binge, buying US companies. You don't sell a company
you just bought because of exchange rate changes.
Still, some capital that went into US stocks and bonds
could come back out if the EURO were to rally too
strongly.
Those of you interested in the direction of US stocks,
should pay special attention to the EURO. If it moves
too high, some foreign capital will flee the US market. (see
our report on the Euro to confirm key levels to monitor).
If it sinks again, it will renew worries that US companies
will have more earnings disappointments due to
currency exchange rates. Either extreme could have
negative consequences for US stocks and bonds.
Our longerterm view is that the EURO will continue
to sink, and we believe the nearterm risk is also to
the downside. But again, see our reversal levels in
our reports to confirm a large move in either direction.
Many of you will have noticed the correlation between
the rising price in oil and the plunging price of the Euro.
Could it be that OIL will spike higher again soon? It
is not only possible, it is quite probable. It may even
happen before November 6th. That would be very
interesting. You can imagine what another spike in
oil would do for both stocks and bonds. |
