Wednesday, October 14, 2015

Outlook: Oil & $

...Turning and turning in the widening gyre. The falcon cannot hear the falconer; Things fall apart, the center cannot hold; Mere anarchy is loosed upon the world.
- W. B. Yeats

How does this relate? Oil, my friend. The CPI may not include oil and food, but you and I, dear reader need it every day. One-half of the equation (former)is down over 50% while the latter half is up around 10%, although the government says otherwise. We have benefitted due to the additional strength of the dollar. This is why we have been able to meet life's obligations with many living a good life and the rest of us just existing. With that stated it is important to look deeper into oil because any spike will cause serious inflation to most of us. Yes, I call it inflation, although the pundits will just say that oil is just returning to its price level. That level eats out the house in most of us.
We all know the reasons why oil declined. All one has to do is follow the petroleum reading on Wednesday. Inventories of US oil is 100 million barrels above their five-year average. The global market has more oil than demand. Those two factors tell me all that I need to know except will it continue.
Morgan Stanley
the big Wall St. house says it believes the oil market has stabilized and because China will grow, so will the demand side. They add,"...not only in oil, but commodities." Could this proclamation by this institution be the cause that oil rose 9% last week? Let me say this disclaimer: Never Trust Wall St.
Here is the way I see this price action. Gold and silver have been moving to the upside with conviction. This worries Wall St, the Fed and the government. They do not want to see another generation getting into the Founder's belief in precious metals as money, however M.S. is looking to hop on the bandwagon by declaring all commodities and at the same time, take some luster off the enemy of the fiat state. Like all pundits, they offer partial truths. In this case they remind us China is still growing to the tune of 6.8% and China consumes 50% of the world's production of: copper, nickel, aluminum, steel and coal. In addition, they are second in oil consumption and lead inmost industrial categories.
A successful investor, E.B. Tucker also likes the price action in oil, however he favors oil tankers as the way to monetize the upside. He likes Euronav (EURN)because they have an upgraded fleet and they pay out 80% of their profits in dividends. He might be on to something, but $13 is the highest that I would look to enter. One reason is the trend. Supply and demand still favor declining prices. The other reason has to do with US production. It peaked at 9.6 million barrels this year in June. US companies have been able to hold off the price destruction due to hedging. Even with that conservative approach to production, the leaders have fallen. Exxon (XOM)is off 52% and CVX is down 34%. Many other companies will suffer in 2016 because their hedges will expire. Most of these type of contracts are one year in nature. X.O. will be hurting along with most of the shale oil producers. Pioneer will get $70 a barrel in 2016. They are one of the lucky ones, but there are very few others with extended contracts. Production will gradually shrink, however if demand doesn't close the gap, prices will still decline. That is the big "if" for 2016.
Saudi Arabia
has preempted any market niche like the vote in Congress to allow US companies to export oil. I can only hope the ban continues because US citizens will pay at the pump if the ban is lifted. Nevertheless, OPEC is discounting its oil price to Asian nations to maintain control in the oil world. Then, we have the other important part of the equation...
The Dollar
The dollar began a rise in July 2014 from .80 cents to back to a dollar in value. Pundits claimed it would be at par to the Euro by now. Did you read my disclaimer? Never Trust Wall St.
At present the dollar slid to .94 cents and it is trading sideways. I see a continuation in decline. There will be no interest rate hike by the Fed which would have put the dollar at par to the euro. The bond market also sees negative rates and so does reality.
US Treasuries
did something that it never did before: paid no yield. No compensation to borrow three-month treasury notes. This is the transition to negative yields which is already happening in the world. This will lead to banks charging you to deposit your money and if a crisis happens, you could lose access to your own money.
Some have spoken out against the Fed like Carl Icahn, Howard Marks and Casey Research because they see that we are losing our free market, especially in money. Central bankers have skewered the free market with cheap money and they are gumming up the system. As a result I see the dollar returning to its breakout point of .86 cents. This will cause inflation here and around the world. This will not be good for oil demand. When the storm passes, I like CVX and EURN if it falls to $12.
And as always the culprit is the Federal Reserve which is why I say, End the Fed!