Thursday, January 8, 2015

OIL: Is It Being Manipulated?

The action in the oil pits makes me wonder if something is afoot. Don't classify me into one of those conspiracy schools until you get the facts. No, I'm not singing an old Beatles song,"...This happened once before. I came to your door. No reply..." Because like the Beatles, I saw  the light in your window.
This happened once before
Remember the Libor rate fixing by the big banks? Remember the aluminum price rigging by Wall St. banks? And the ongoing investigation into the banks of Wall St. concerning the suppression of the price of silver? of gold? There are others. The point is made. These things happen. Oh, yeah, the biggie. Did you ever hear or remember the Plunge Protection Team(PPT)? It was created to "intervene" into the stock market after the crash of 1987. It consists of the Secretary of the Treasury, Chairman of the Broad of Governors of the Federal Reserve, Chairman of the SEC and Chairman of the CFTC. So, there is plenty of proof of past and present market manipulation.
Now, let us turn our attention to the price action in oil.
Three Years: 2012-2014
oil has held steady in a range from $90. to $105. dollars per barrel. There has always been an over cost built into the price due to geopolitical concerns. It is steep around twenty bucks. That meant oil should've been priced at around $70 to $85. per barrel.
Prior to the financial crisis of 2008, oil consumption grew at a steady 2 to 3% a year. In the 1980s oil usage held steady at 80 million barrels a day. With the advent of industrialization in China and India usage swelled to 90 million plus barrels a day in world consumption. In addition, prior to the world recession due to the financial crisis, world oil stocks were at a healthy 90 million. Then, there is Saudi Arabia which could be counted on to add swing supply. The big concern with oil was new discoveries. Brazil had the biggest, but it is too deep underwater to extract. This is still the case today.
US Tech and Innovation
with fracking innovation US production has increased by 50% since 2010. We are actually the number producer of oil: Not Saudi Arabia, not Russia nor Canada. This contribution should've relieved the geopolitical price concern, but it didn't until last year. It began to influence the market after the Russian intervention into Ukraine and later, annexing Crimea. Coincident? Before one assumes the answer, consider oil inventory levels. US inventory levels are posted every Wednesday and if you check it, this is the result. Our oil stocks were actually higher in 2012 and 2013, so how come the decline in oil took so long to take effect? In those years, we had about 397 million barrels of oil in reserve. Today, it is down to 382 million barrels. This contradicts the price action in oil as the US is the world's largest user. As for world stocks, they are down to barely cover world demand. Looking objectively at this piece of info, I would say that it is a wash. This is according to EIA, the Energy Information Administration. World production hovers at 90.136 a day and demand is at 90.370 per day. However, some of this demand is inventory building and not actual need. There is plenty of swing supply if needed. Bottom line: oil is plentiful and slowly building a glut in supply. The supply is actually 1% over demand, but this is a thin buffer. If a geopolitical event caused disruption, prices would rise again. In addition, there is a growing alternative energy supply. Total world energy is above demand. World produces 530 plus and it uses 528. If Compressed Natural Gas(CNG) cars were being sold, I could see oil fall, but that is not the case at present. Again, supply price should be neutral which places oil in the $70. to $85. range.
Pressing Buttons
No question, Russia stirred up trouble. There is really nothing no one can do about it, but then again, you can hit it where it hurts. Russia's economy centers on commodities with oil on top. Now, if one wanted to put a hurt on Russia, they could've started to short oil with big, big bucks. Question: Who has that kind of money? Who has the motivation?
is my guess and I'm thinking that they are the new member to the PPT. They have the money and the motivation. I think that they came up with another one of their half-ass plans. They put big money to work, but they forgot about the speculators and hedge funds. These people see big money move the price of oil. They jump on the trend and the original push to the $70. to $85. range, now is well past breaking $50. per barrel. By the way many other commodities are hurting too. Iron ore is down 65%.
New Problems
Price action in oil suggests that there is no resistance to this trend all the way down to $32. per barrel. This will cause high losses for oil produces like Canada's oil sand's. In addition, all the small oil frackers that entered the market by utilizing the Fed's cheap money at low rates will be in serious trouble. They will lose money on every barrel that they sell unless they hedged their production. Those hedges are usually only one year in duration. So, by next May, defaults will begin. You see, dear reader, smaller oil firms had to get their finances from high risk bonds. At present, this is 15% of the segment of the high yield bonds. Banks are on the hook for another 23% of their loan portfolio. The idiots who manipulated the market did not take into account the consequences of their actions, which is usually the case. As my man Forest Gump would say, "Stupid is what stupid does."
Of course, there are winners here. The paid shills in the media will remind you daily that the consumer benefits. Some people say that the consumer will have $700 billion extra to spend. That sounds great except the Republicans will steal some of it through state and federal taxes on oil for infrastructure. Yes, I'm making that prediction. They will use the same shills to inform you that we will be able to fund money for roads, bridges and create jobs. The same old same old. Instead of spending $500 plus billons for war and the military every year, we could've rebuilt America a long time ago. The shills never mention that aspect of our budget and the military complex and influence.
There will be other winners too. European consumers along with the economies of Korea, India and Thailand will all benefit. However, there are other more serious losers.
Foreign Loans
Emerging nations took some of the Fed's cheap money too. They grabbed and grew until now. The global community is slowing and those loans were made in US dollars. Guess what? The US dollar is rising which makes the loans more expensive. It is like an adjustable mortgage and now, your pay rate is higher because your money is worth less through devaluation. Shortfalls in budgets will really hurt. Venezuela needs oil at $121. per barrel. Nigeria needs oil at $119. per barrel. Iraq needs oil at $106. per barrel.
Commodity driven economies get their money from oil. Venezuela gets 51%. Norway and Russia get 19%. The list is long. I think you get the point. Australia derives 5.7% of its GDP from commodities, and South Africa is in the same boat. This means trouble in River City. Defaults could spread unless there is rollovers to the loans. This looks very iffy at present. Together, all these financial pressures could trigger a derivative and once that happens, you will agree with me, End the Fed!