Weekend June 22, 2014
The Price of Oil is Abnormally Quiet Suppose you were on the proverbial desert island, out of reach of the news. And we told you that
a mere 4,000 warriors had re taken Fallujah, major Iraq oil fields, and great swaths of east Syria and North Iraq. What would your guess be on the price of oil? A lot higher than $105 I would imagine. But it is very little higher.
Of the three Es discusses in Chris Matensen's model. Energy is the most important. And here at TMP we have long held that oil is the most emotional of all the markets. While world demand has increased, the price of oil since 1999 has varied far more than thedemand for oil. Now it is happening again.
We embrace the tenets of socionomics because, indeed, emotions rule the markets. OIl is oil and it does what it does becoming kerosene, jet fuel, gasoline, whatever. But the emotions towards oil and its value vary dramatically. In 1999 oil was $12. By 2008 it was $145, and then by Christmas that year, $35. You may say this is nuts, no it is socionomics.
A frequent question in Letters to the Editor columns is
If the US is producing so much oil, why is gasoline still $3.50 a gallon ? Good question.
And the answer is that we are only producing more oil if the net production of oil discovered exceeds the net consumption of oil used to find replacement oil. And that is not happening.
Sure fracturing produces more oil, but these wells are routinely being drilled to extraordinary depths of over 10,000 feet. Recall the BP blow out well was offshore at 15,000 feet deep. So oil is getting more and more expensive to find. Fracturing pumps now run to the thousands of horsepower to spread the shale at two miles plus below ground.
So if the cost of finding oil is going up the price has to go up right, well not so fast. Recall that the cost of production varies widely around the world.
Already expectations are exceeding reality.
XLE XES, West Texas Intermed, Brent
Energy is the ETF XLE for large oil companies, XES represents large energy service companies like HAL SLB and the last two are the price of Texas and North Sea Brent. As you can see, enthusiasm for the producers and suppliers of energy far surpasses the reality of the increase in price of oil.
The top of the oil price in 1981 occurred as the number of operating oil rigs in the US soared to 4500 while the rpice of oil began dropping. We had too many wannabes chasing a diminishing brass ring. Could that be happening again?
Frankly this graph is not telling me what one General remarked this week
Iraq is gone.
Finally the NYMEX futures indicate that oil for delivery a year from now is trading a solid $10 lower than current prices. So traders are not worried about future supply, indeed they are seeing either plenty of supply or less demand or both.
CRB The FED money machine is beginning to feed inflation.
The downtrend line has been broken.
We do not have a crossover of the 13 above the 34 week EMA for gold quite yet, but it is getting very close. Numerous sites including stockcharts have declared we have buy signals in gold and gold shares.
GDX, GDXJ
We shortened this to 185 months for clarity. clearly we are starting to see some of that same commodity inflation that we had in 2008.
hanks for reading The Market Perspective
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