Friday March 4, 2011
Triple Digit Fear and Loathing
Crude oil is about 27% higher than a year ago, not an alarming gain, History shows a 50% rise (now $120) start to hit corporate earnings while an 80% rise ($150) has historically led to recession.
Gina Martin Adams, Director of Equity Research Wells Fargo Securities
Let’s remember that, next time the oil patch is on its back with $35 oil prices ala Fall 2008, we can remind everyone that, after all, a 27% rise is not an alarming gain.
This sort of nonsense gets trotted out to glibly justify high and soaring prices in such times. The fact is, roller coaster parabolic rises nearly always end badly for oil producers as well as the service industry. Our aim today is to provide some perspective on historic oil prices; where are we now in relation to past tops in price?
The inflation adjusted oil price chart shows that the 1980 peak of $36 translates to about $110 in today’s dollars. With oil at $102, that alone is a warning sign. The run-up in 2008 went to $140. Given the time proximity of that run, let’s examine it in detail.
In February-March, 2008, prices broke out of their sideways pattern and jumped above $10. Price fell back almost immediately to test that break out in April. The fall was from $110 to $100. Price then started up in a nice unbroken channel form $100 in early April to $145 by late June. That is a 40% rise in just three months. And then it was all over.
Oil fell back to $100 by September. So the fall back lasted the same three months as the price rise on the way up. Price broke the 200 week moving average in October, then at $75, and collapsed to $40 by early December.
I do not have a record of whether Gina said that the price drop helped corporate earnings. It certainly did nothing for earnings of oil service companies. Or the tax roles for Andrews local governments for that matter.
Coffee, corn, soybeans, and lumber are still at the top of their charts.
So best guess is that the analog of 2008 will repeat. Recall that gold and silver topped in March of 2008. Whether that will reoccur exactly the same way we cannot know.
What we do know is that right now there are no shortage or supply interruptions in the oil market. The run up is based on sheer fear and speculation that there will be a supply interruption. The Mid East is expressing the desire for the same standard of living that the Chinese enjoy. 1200 years of social lag time is being compressed into 2011 as demand for change.
The most realistic expectation is that whatever happens, more oil will be produced to satisfy the masses. The yearning for a better standard of living in the Middle East can only be satisfied in the short run with more income, read, more distribution of oil income.
Meanwhile back here at the Ellenberger ranch, Barack Obama is surely the Citizen of the Year for West Texas. All hail $100 oil. His policies of denying permits for onshore and offshore drilling, clamping down on coal plants, and producing EPA regulations faster than any previous administration have led to even less domestic ability to produce our own oil. No one else has delivered triple digit oil prices for Andrews like Barack. But this is the administration, like John Kerry, that wanted high gasoline prices, all the better to force and support alternative energy on us. (Has anyone filled up their electric pickup at the wind farm in Stanton, just wondered….) Four dollar gasoline coupled with double digit unemployment seems a strange brew for a re-election bid to this writer but then I never bought into the global warming argument anyway, (See photos of cars stalled in snowdrifts on Chicago Lakeshore Drive just weeks ago).
At this point our best estimate is higher oil and gasoline prices into the summer. Our best analog is to compare energy service industry stock prices now and in 2008. The XES Oil Service Exchange Traded Fund ETF now sits at $43; it topped in 2008 at $50. That leaves seven bucks on the upside to go. Notably the XES share price topped before the price of oil peaked in 2008. . It may seem redundant to keep covering oil prices in coming weeks but frankly this is the economy of West Texas . We intend to keep readers updated.
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