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Is the "oil rule" the new "golden rule?"
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A curious divergence between oil stocks and the stuff
itself,
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Where the vultures shall gather and plenty more...
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Eric Fry, reporting from Laguna Beach, California…
Oil
up, oil down, oil back up again…and then up some more. The oil market
is out of control! Daily price moves of $3 to $5 are becoming
commonplace. Last week, the oil price rocketed $16 higher in just two
trading sessions.
Oil
skeptics cite this extreme volatility as proof that "speculators" are
running the show in the trading pits and that the "oil bubble" is
about to burst. But your editors here at the Rude Awakening merely
observe the pyrotechnics with awe…and a chuckle. After all, wasn't
this the same commodity that so many experts pronounced "overbought"
at $70 a barrel, then at $80 a barrel, then at $90 a barrel? And by
the time oil topped $100 a barrel, didn't the experts rush to dismiss
the advance as a "blowoff top?" And now that oil refuses to fall back
below $100 a barrel "where it belongs," hasn't the word "bubble"
became a staple of the experts' vernacular?
"Certainly," the oil skeptics have been insisting for many months,
"fundamental demand is not boosting the oil price. Obviously," the
skeptics continued to insist, "the speculative buying will end and the
oil price will tumble back to its 'fair value.'"
But
so far, the "certain" and "obvious" trades in the oil market have
produced disastrous results. The oil market will retreat if and when
it wishes, not before.
Certainly and obviously, the oil market is "overdue" for a correction.
The oil price has become extraordinarily volatile, which is a trait
that tends to accompany market tops. Nine times this year, the oil
price has moved more than 4% in a single trading day. For perspective,
the oil price achieved this feat only eight times during all of 2007
and only three times in 2006. So something different is going on.
But
oil's toppy short-term action does not negate the powerful long-term
forces that have been driving it price higher…and will likely continue
to do so. Global demand for the precious black goo remains robust,
while global supplies remain constrained.
And
let's not ignore one additional "long-term force" that is also
wielding a powerful – albeit subtle - influence over the oil price:
Dollar devaluation. The skyrocketing oil price is as much a monetary
phenomenon as a geophysical one.
Several previous editions of the Rude Awakening have examined the
growing connection between the falling value of dollars and the rising
value of crude oil. [See: "Selling
Dollars, Buying Stuff " June 5, 2007 and "What
Comes After A Trillion? " May 8, 2008.]
In
today's column, Byron King, editor of Outstanding Investments,
contributes a few additional insights about the "Anti-Dollar."
--- Byron King's Energy & Scarcity Investor ---
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------------------------------------------------
The Anti-Dollar
By Byron W. King
Oil
has become the "anti-dollar" of modern times. Oil is now serving as
the source of global monetary discipline that gold used to perform.
Oil
is the energy life-blood of all modern economies. So when a nation
debauches its currency, the oil markets react instantly. And oil will
not accept monetary malpractice, certainly not by the U.S. Federal
Reserve. If traders perceive that the dollar is declining, this
perception lights the fuse for oil prices to rise.
There is an old saying that "You can't fight the Fed." But oil is
fighting the Fed. In fact, oil is scoring a knockout, like Muhammad
Ali over Sonny Liston. Oil is floating like a butterfly and stinging
like a bee - landing body blows and pinning the Fed against the ropes.
The
Fed can no longer cheat with the money supply and get away with it.
There is a new gold standard and it's called "oil." This may not be a
monetary "fact" that central bankers would acknowledge publicly. But
it is a monetary fact of life out in the trading pits.
Even
the President himself is powerless to alter this new fact of life. He
cannot simply fortify the dollar's supremacy by seizing the world's
oil at $20.67 a barrel, like Franklin Roosevelt seized America's
privately held gold for $20.67 an ounce in 1933. And even if the
President could confiscate the world's oil at below-market prices, he
might not understand how such a confiscation would influence the
dollar's value.
The
"oil connection" to monetary policy is a new and poorly understood
development. It's not what people expect. It's not how we all grew up.
It sure did not used to be this way.
For
the past 149 years, it has been a fairly safe bet that the world's oil
supply would grow. The only truly difficult period for oil was between
1979 and 1981, when the Iranian oil industry collapsed in the wake of
revolution. The world supply-chain lost nearly five million barrels
per day of output. And that loss helped produce the worst recession in
the U.S. since the 1930s.
But
even back in the early 1980s, new oil sources were coming online.
Everybody could see it. The fields of Alaska, the North Sea, Mexico,
Angola and other places were just kicking into gear. So the price of
oil could not go "too high" because there was a clear indication in
the marketplace that there would be more oil coming down the pipes.
And
that's exactly what happened. By the mid-1980s, oil was selling for
less than $15 per barrel. Cheap energy made a lot of things look easy,
from growing the economy to winning the Cold War.
There was a dark side to cheap oil, however. It produced and nurtured
the illusion that oil would be cheap forever…or at least for a very
long time. But looking ahead from today, it is crystal clear that it
will be more difficult to grow the worldwide oil supply than in the
past. We may be at Peak Oil right now, but we won't know that for a
while.
Oil-producing areas like Alaska, the North Sea and Mexico, are in
decline. Meanwhile, as worldwide oil demand grows quickly, oil output
is at a measurable plateau. There is almost no "spare" capacity
anywhere outside of Saudi Arabia, and the Saudi margin is smaller than
most people think. At the same time, net oil exports are decreasing
from most oil-producing nations. Internal demand is rising in almost
all oil-producing states. So there is simply less oil to go around.
And unlike in the early 1980s, there's no relief in sight.
Oil
supplies are severely constrained. Dollar supplies aren't. Perhaps
these related facts are what inspired Alexey Miller, the CEO of
Russia's oil giant, Gazprom to predict that oil would rise to $250 a
barrel in "the foreseeable future." The Fed can "talk" a strong dollar
all it wants, but as long as the supply of dollars and
dollar-denominated credit continues to grow, the oil price will
continue to climb.
In
the era of Bretton Woods, the global monetary system followed the
golden rule: "He who has the gold makes the rules." But today, the
"rule of crude" dominates. Thus we are left to ask, what is the
meaning of crude oil at $137? It means that the reign of the dollar
is coming to a close. The dollar has reached the end of its
post-Second World War period of dominance as the world's reserve
currency.
That's why today's oil buyers, like the late French President Charles
de Gaulle, are so eager to exchange their dollars for a tangible
asset. De Gaulle shipped France's dollar reserves across the Atlantic
in exchange for gold bars from the vaults of Fort Knox. Today oil
traders are shipping their excess dollars to the New York Mercantile
Exchange in exchange for barrels of oil. The motives are identical.
Only the underlying monetary asset has changed.
So
what of the U.S. dollar? Well, a man named Lazarus once rose from his
death bed. But Lazarus had some help. Could the dollar be as fortunate
as Lazarus? These words come to mind, from the Book of Luke at 17:37:
"Where the corpse lies rotting, there the vultures shall gather."
[Joel's Note : In an era where the Fed's dollars are
plentiful and Mother Earth's resources are scarce, preserving the
value of your investments is becoming increasingly important. And
that's precisely the aim of Byron's Energy & Scarcity Investor
research service: to seek out long term investment trends in an era of
mounting human demand and dwindling natural supply.
Don't let the stories of skyrocketing food prices and record oil sink
your investment future...profit from it instead. For a sneak peak at
Byron's latest report,
read on here
-----------------------------------
Did You Notice? – What to Do with Oil By Eric Fry
Even
ardent, long-term oil bulls might be anxiously wringing their hands
these days. Sure, the oil price is heading higher, but the daily price
volatility if terrifying. Some days the oil price plummets $3 or $4
dollars and looks every bit like a bubble about to burst. But then,
just as suddenly and violently, the oil price soars $5 or $7 or $11 in
a single day!
So
what's an investor to do? Buy oil or sell it? The answer may be
"both." In other words, sell crude oil and buy oil stocks. We realize
that we are not the first market observers to identify this
prospective pair trade. Further, we realize that any investor who has
attempted this pair trade during the last several months has fared
poorly, if not miserably. But so be it. We are happy to be "late" to
this trade.
Admittedly, oil might continue to soar while oil stocks languish. But
as the chart above illustrates, the divergence between crude oil and
oil stocks has already reached a rare extreme. Could this divergence
become even more extreme? You betcha. But on the other hand, some sort
of regression toward the mean seems like the high-probability bet…at
least for those who enjoy betting.
--- Attention Executive Series Member
---
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------------------------------------------
[Rude Endnote: For the record...We begin this
Thursday's trading with the DJIA over 200 points lighter at 12,083.77.
The S&P 500 kicks off 22 points lower at 1,335.49 and the NASDAQ,
after slumping two and a quarter percent yesterday, begins trading at
2,394.01.
In
the commodities sector, gold got belted in yesterday's trading,
falling $11 to around $871. Oil fell a buck fifty to sit a shade under
$135 per barrel.
Meanwhile, the dollar index approached its highest level in a week,
gaining to 73.565 after Bernanke assured us the risk of a deeper
economic slowdown is receding.
Hmm...the highest rate of job losses in 22 years, $1.7 trillion of
household equity wiped out in the first quarter, record oil squeezing
manufacturers' profits, ongoing debacle in the financial sector...
If
this paints a rosy picture for Bernanke, we'd hate to see his doom and
gloom report.
Until tomorrow...
Cheers,
