Greg’s Note: Despite OPEC monopoly control and outright
depletion, oil prices are down due to sheer destruction of
demand…but demand for oil isn’t something that’s likely to be
destroyed all that much. Byron King expects that this demand
will start growing again soon enough. Send all questions and
comments to
greg@whiskeyandgunpowder.com.
Whiskey &
Gunpowder
By Byron W. King
November 6, 2008
Pittsburgh, Pennsylvania, U.S.A.
Along with the market
decline, the price of oil has fallen. It’s down 50% within three
months. Back when oil hit $147 per barrel in July, I said that
the price “ought” to be in the range of $100-110, with the
possibility of a drop into the $90s. That’s what the
fundamentals told me back then.
Most of the decline in
oil price from $147 down to about $100 was directly related to
the strengthening of the dollar. So the oil price slide in July,
August and the first part of September was mostly a monetary
phenomenon.
Then we had the
mid-September credit crunch and market meltdown. That dragged
the price of oil from $100 or so per barrel down into the $70s
(with price excursions down into the $60s). The demand weakness
for oil has become clear in the past six weeks or so. Everybody
just sort of woke up and figured out that the world was entering
into a recession. The flip side is that inventories are building
back up.
~~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~
The Fed’s Handout
Line Open to All Failing Companies
Who will be the next
failing company to come to the Fed with hands out ready for a
handout? It’s hard to tell…unless you have the right
information.
One quick look at the
secret 100-F document of Lehman Bros. and AIG would have
predicted their collapse. Find out which company will be next
by clicking here.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This has taken down all
of the oil and oil-service companies. Among the latter,
Superior Energy Services (SPN: NYSE),
Halliburton (HAL: NYSE) and
Baker
Hughes (BHI: NYSE) have all tumbled. Even the
perennially “too expensive” Schlumberger is way down.
The thing about the oil
service companies, though, is that a lot of their business is
all but recession proof. And much of the oil service business is
immune even to wide swings in oil prices. That is, many oil
company capital budgets are drawn up a couple of years ahead of
time. So oil service companies should have work despite the
macroeconomic situation. Not as much as in the boom times,
maybe. But it’s not going to be as bad for the oil service
companies as a lot of people seem to think.
There are many reasons
for this. Sometimes an oil company has leases that are going to
expire if it does not drill within a certain time frame. So the
oil company has to drill. Or maybe the oil company has a rig
under contract. So it has to drill before the contract expires
and the rig moves on to other sites. Or maybe there is
maintenance or a major workover on a well or field that just
plain has to get done for reasons of safety or the environment.
As I said, there can be a lot of reasons.
So keep an eye on the oil
service companies. As Monty Python once said, they are “not dead
yet.” The oil service companies are way down from previous high
prices. I believe that this is a time to nibble. Don’t blow your
whole wad of cash, but begin to accumulate a position while we
watch how the larger economy unfolds. I think we’ll see stronger
oil prices sooner, rather than later.
Oil Exporters
Surprised, and Waiting at the Rope Line
Speaking of how the
larger economy unfolds, some of the most surprised people on the
planet are the folks who run oil-exporting countries. Hey, they
believed their own press releases. They thought that oil prices
would continue to rise upward, ever upward. All they had to do
was figure out what to do with all the money that was going to
pile up in their bank accounts. No waiting at the rope line for
these worthies. But right now, demand destruction trumps even
market manipulation by OPEC, not to mention the inexorable
effects of depletion.
~~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~
Get Gold Cheap…
Before It Takes Off Again
Gold is giving you
another chance to get in for the inevitable ride up at a
bargain.
Here’s how to get it at a
discount and multiply those gains.
Click here to read more…
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
So what are the OPEC
people thinking? They are hopping mad. The OPEC folks sure got
used to high oil prices in a hurry. They don’t like these low
oil prices. It costs money to run a petro-welfare state.
According to the
International Monetary Fund, Iran, Venezuela and Nigeria need
oil prices above $95 per barrel just to cover their respective
national budgets. Saudi Arabia requires oil prices above $75 to
cover its budget. Well over half of the revenues of the Russian
Federation come from taxes on hydrocarbons. Mexico gets over 40%
of its federal revenues from taxes on Petroleos Mexicanos
(Pemex), the national oil company.
So low oil prices are
causing problems for the oil-exporting states of the world. No
major oil exporting country can long afford to see oil prices
where they are now. Come what may, OPEC is going to turn valves
and reduce supply. It’s just a question of how soon this will
occur, how much oil OPEC will take off the market and what that
will do to pricing. No less an authority than Hugo Chavez of
Venezuela recently stated that “Venezuela can live with a price
of $90 to $100 per barrel. But not less than that.”
“The Era of
Cheap Oil Is Finished”
According to Iranian Oil
Minister Gholamhossein Nozari, “The era of cheap oil is
finished.” When a reporter from the New York Times
asked Nozari what price Iran would want for its oil, Nozari
declared, “The more the better.” Nozari stated that he is urging
his fellow OPEC members to cut production by up to 2.5 million
barrels per day.
How much oil is 2.5
million barrels? By comparison, the $6 billion
BP (BP:
NYSE) Thunder Horse Platform — 20 years in the
making in deep water in the Gulf of Mexico — should produce
250,000 barrels per day by the end of 2009. So with one move by
OPEC, there goes the equivalent of 10 Thunder Horses.
OPEC representatives are
touring national capitals, urging non-OPEC oil producers, such
as Russia, Mexico and Norway, to follow the cartel’s lead and
cut production, according to Reuters news services. OPEC is
trying to engineer a coordinated move to drive oil prices back
up over $100 per barrel.
Most OPEC nations have
already reached their own version of “Peak Oil.” Traditional
oil-export powerhouses like Iran and Kuwait have admitted as
much. Aside from Saudi Arabia, most OPEC exporters see a window
of less than 20 years for significant international oil exports.
By then, internal rising demand and falling output (due to
depletion) will severely constrain the world oil markets. So all
OPEC nations are interested in selling oil now for as much as
they can get.
~~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~
The End of Cheap
Oil
You wouldn’t think so.
After all, oil prices just plummeted…
But the fundamentals are
clear as day. Oil is destined to get a lot more expensive.
It’s going to change life
in the U.S. and the world…forever…but you can protect yourself
and prosper…
Click here to take advantage of oil’s temporarily lower
prices.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
“We Want the
Money Now”
Last May, I attended the
Offshore Technology Conference in Houston. I had a revealing
discussion with an oil manager who works for the national oil
company of an African country. He told me this:
“The Saudis think there
is an ‘optimum’ price for oil. They don’t want to raise prices
too much, too fast. They say it will kill the economies of the
West. But for my nation, we disagree. There is no ‘optimum’
price for oil. We don’t care about the economic effects on
Western consumers. If Western consumers want to drive, they
will pay. Or they can walk, like millions of people do where I
come from. So we pump oil every day. We want to get as much as
we can for the oil. We want the money now so we can fund the
priorities of our national government. We cannot tell the
people that they have to live in poverty for another
generation because we are afraid that Westerners will not be
able to drive their Mercedes-Benzes.”
So you can see why the
odds favor rising oil prices within a few months.
That’s all for now. Until
we meet again,
Byron W. King
P.S.:
Oil is truly going to be a lot more expensive and the price will
be driven by fundamentals — diminishing supply versus growing
demand — rather than any speculative actions. In short, next
time don’t count on a huge price pullback like the one we saw
this time around. For more on this,
click here.
