Is Oil a Financial Thing?

In The Prize, Daniel Yergin laid out the argument that volatility (not high prices) of oil in the early 1980s was caused by financial speculation.  The primary means of speculation was through derivatives.  The NYMEX had then recently introduced future contracts and, according to Yergin, the story goes that guys like T. Boone Pickens made a small fortune off playing the volatility.

T. Boone had dabbled in cattle and cattle feed and so was well versed in futures trading.  Flash forward 30-something years and we see a parabolic drop in oil prices.  It is a straight line, so to speak, and reads more like a panic riddled sell-off (drop in demand) than a supply driven increase.

Commentary from Charles Hugh Smith's blog:

Crowded trades (trades where almost everyone is on one side of the boat) unwind in precisely this sort of freefall. Once the trade has been unwound, however, the selling cascade exhausts itself and insiders who know better start buying. Buying begets buying, shorts start covering, and voila, a retrace that fills open gaps and kisses the 50-day moving average surprises everyone who was confident oil was heading straight down to $40/barrel. 

As I said before, the monetary base stops expanding and the Fed ends QE, all as oil prices begin their plunge.  Still think the Fed will raise interest rates this coming summer?  Does the Fed take the punch bowl away when the party is just getting started?

More Pipeline Politics

In case you didn't have a FT subscription (don't ask why I have one):

Russia produces about as much natural gas as the US, which is about 6 times the amount Saudi Arabia produces. I recall, as a sophomore in college, reading The Prize and setting the book down to give thought to the fact that the majority of the world's oil and gas resources had been discovered before my father was born (1953). So, just how political is energy?

The Chart I Never Saw Coming

Need more time to figure this one out, but it does look very, very interesting.

Out of Oil, Into Treasuries

Where is the safe place for yield?  Prior to the big drop in oil prices, it was just there - oil.  After a 40% drop in prices over the past few months, investors need to look elsewhere.  And what timing for them to go into US treasuries, if they so choose, as the Federal Reserves exits its third installment of Quantitative Easing and the stock markets begin to dip on weaker than expected consumer numbers.

Ladies and gentlemen, the Fed has left the building.

Where Does That Capex Go?

Reuters report, link via CNBC, with a headline saying that E&P spending could drop by as much as $150 billion in 2015.  That is a lot of money.  So who makes all this stuff for the oil and gas industry?  All the pipes, rigs, pump, computers, compressors, ROVs, etc, where do they all come from?

Certainly oil exporting nations pay for capex to produce oil.  But do Nigeria, Iran, Iraq, Libya, Saudi Arabia, etc produce the equipment they have installed in their fields?  I wonder if countries like Sweden and South Korea won't take a hit from all of this.

Why The Drop In Oil Prices? Three Examinations

First: Libya?  Libyan production skyrocketed by over 500,000 barrels per day from June to September of this year.  Reached a peak of about 900,000 barrels per day.  But now?  There seems to be conflicting reports as to what is happening in Libya.  It seems the rebels have taken over oilfields, but production will continue to come on line.  Libyan production was at 900,000 bpd in September but now may be at 500,000.

Second:  Supposedly Saudi Arabia has been offering lower prices for oil in US markets than in Asian markets.  Nigeria, an OPEC member, has seen exports to the US dry up while Libya restarts exports to Europe.  So there are some real reasons Saudi Arabia has to backtrack on its "US shale doesn't concern us" attitude it has promoted the past two years.

Third (put on your tin foil hat): The Federal Reserve (see explanation below)

The monetary base stops expanding, so institutions with bets on rising oil prices begin selling.  Eventually, the Fed announces the end to QE3 and weeks later the Saudis give the death knell with a "we're not finished, yet" response at OPEC.

Bring 'Em Out: Rise of the Consumer

So, I do not read Business Insider. Which is why I chose to use one of their headlines as a contrast for my thesis of rising consumer spending.

Black Friday Revealed How Poor Americans Really Are

Black Friday sales plummeted this year, leaving retailers completely stumped.  

After weeks of declining gas prices, many analysts predicted the biggest holiday season ever. Industry groups like the National Retail Federation reasoned that Americans would use their fuel savings on gifts.  

Despite encouraging forecasts, Black Friday weekend sales were down 11%. Cyber Monday sales rose 8%, falling short of many predictions. 

So where are the customers?

Where are the customers at? Where they at?

The Lord Purveyor of Future Obligations, His Royal Roll-Over of Timely Payment,  Fortress of Accountability, Luke The Debtor saith: Buying higher ticket items.

That's just me. Maybe no one else feels that same way. But after 6 years of paying down debt, I wonder if this drop in oil prices is giving people the premature illusion of prosperity. But, the data are not in to show this. Where are the customers? It is time say Luke The Debtor...bring 'em out!