Professor Elam

Tracking the Oil Price Decline - My Recent Newspaper Columns 9/9/14

Sept 9 2014

Word Count   767

Too Much of a Good Thing

Two weeks ago in this space I was able to state that the price of crude oil was able to hold its uptrend line. Today that is not the case. Crude oil prices are breaking down and are apparently a good deal weaker in real West Texas Intermediate Crude WTIC prices than what we read on the New York Mercantile Exchange. There are two schools of thought on whether this is good or bad for the overall economy. For sure it is a warning shot in the Permian Basin and the Eagle Ford Shale producing areas.

The spot price of WTIC has dropped from its June high at $107 to just under $93. Price fell through a ‘triple support area’ at $99. This past week witnessed huge intra day swings of over $2.50.  I would expect a rebound to perhaps the $97 area and then a resumption of the decline. We have seen similar declines in other commodities such as gold, falling from its July high at $1340 to below $1270. The silver chart is even weaker.  The Commodity Research Bureau Index representing a basket of commodity prices including energy continues to fall. It is now trading under the 200 day moving average of 295.

One school of thought is that falling energy prices will. boost the economy. Some department store stocks were up this week on the idea that consumers would be more likely to drive to the store.  Personally I am not so sure it will work out that way. Perhaps we are seeing the return of the 2007 start of a deflationary wave. The fortunes of oil exporting states provide an interesting window on this debate.

Saudi Arabia exported 878,000 barrels of oil to the US each in August. It sold for 48 cents less a barrel than Louisiana Sweet. This is the narrowest discount since Bloomberg started keeping data back in 1991. Here is the rub. THE Saudi Oil Minister Ali al-Naimi predicted last December Saudi shipments would average 1.4-1.5 million barrels a day. So real exports are 500,000 barrels a day less, which at $100 is a $50 million dollar a day, drop!  The reason of course is the expanded output of US oil production.

In researching this article I note some experts are discounting this as a short-term event, don’t read too much into it. But we keep getting rosy scenario reports of ever expanding US production. Reports of substituting gas for water in fracking or at least reducing the amount of water required lend credence to this view.

As noted some believe lower energy prices will stimulate the economy with all kinds of cheaper energy.  But as I connect the dots it looks more and more like the start of a race to the bottom or for energy prices. The OPEC countries have little to sell other than oil. Other players like Russia have bet the future of their country on strong energy prices. With fixed commitments and entitlements to citizens totally dependent on oil revenue, my guess is that such exporters are likely to sell more and more oil at ever lower prices to keep their revenue streams going. As noted, commodity prices are down across the board, not just in the energy sector.

This is also being driven by a stronger dollar. The world is wondering what Mario Draghi, the head of the European Central Bank, will do. Already he is lowering rates and in some European countries, some very short-term rates are already negative. That does not lave much room for further reduction. France’s Prime Minister Hollande re shuffled his cabinet for a second time in six months still attempting to counter 10% unemployment. Meanwhile the Middle East seethes with civil war. Whoever is in charge will need more money to fight, and surely that means higher production.

Stock prices are dizzyingly high and now down four days in a raw. Monthly volume has been decreasing from the highs seen in March 2009. We have had a more and more narrow focused rally in a few large stocks the last few months.

Taken together, oil and stock prices are more likely to fall in tandem than for falling oil prices to stimulate stock prices. That is my minority view for what it is worth. This December will mark the 40^th year anniversary of the low in the Dow Industrials at 577. I suggest this might be a good time to be watching stock and oil prices, from the sidelines.

Dennis Elam blogs at http://www.themarketperspective.com

Ruble Falls with Oil Prices and Stronger Dollar

Monday Oct 13 2014

Bloomberg reports the Russian Ruble is falling with oil prices. Half of all Russia's revenue comes from oil. Oil just dropped 20%. Bingo Russian revenue just dropped 10%. 

And the dollar is moving up which makes things just that much worse for the ruble. 

Putin has shunned any pretext of a consumer economy in Russia. That would give manufacturers real power. It is much easier to control a commodity based economy centered on oil. 

If you read my newspaper coumn or columns, you know I am fairly confident all of this will resutl in lower prices. Marginal economies like Russia nd Nigerai have no other sources of income. My guess is that they will expand output in to a lower price environment to keep cash flow constant. It won't be constant but that won't stop them from trying. 

And so the price of oil is iikely to fall further. 

The Layered Battery

Weekend Feb 23 2013

The problem with batties of course is that they are forever having to be re charged. 

Now a new process  promises a layered capacitor that can quickly re charge devices. Will this be a game changer?  The short video explains all. 

No Sizzle in Solar

Thursday Sept 1, 2011

The third solar energy company in a month has now declared bankruptcy.

I understand that it also takes a great deal of energy to actually manufacture a solar cell, so much that over the life of the cell the net gain in energy saved is questionable. 

My opinion has always been that solar would best be used as a boost to water heaters. A line could be run from an existing water heater to a radiator on the roof. Given the temperatures we have had this summer, 100+, I suspect a black radiator could easily maintain a temperature of 110 for the water. 

Constructing homes with porches and awnings so that no window received direct sunlight would also save energy in cooling the home. This was standard procedure in homes in the 1890s. 

Here is an example of what I am describing. Both the first and second floors are ringed with porches all around the building. The result is that direct sunlight does not hit the windows. And you can sit outside in the shade. Note the French had this figured out in 1700 but now we have abandoned this great idea. 

HAL Eyes More San Antonio Real Estate

Friday August 26, 2011

Alert business students will keep a watchful eye on expanding business opportunities in San Antonio. 

This spring I suggested a trip to a foreign country - yep, Odessa, Midland. Check out our 

February 2 post.   Of course no one was interested. Well who's laughing now?

Now HAL already owns 150 acres, just south of the Brooks Campus in fact, and is looking to add more property. Alert students will be learning more about the oil and gas business, hey it's called Texas Tea!

Weekly Columm

Friday Aug 5 2011

$85 Oil

Now we have another ominous sell signal. I take these very seriously; everyone in Andrews should do likewise.

One on One, Andrews County News, July 28, 2011

That was our lead in comment last week. We went on to postulate a potential scenario of a world-wide meltdown in stock and commodity prices. Now one week later that scenario is already coming true. For those of you just joining us, we noted that a monthly sell signal in our timing model occurred in crude oil. This is exactly how the world-wide melt down in the markets began in the summer of 2008. We have been warning of such a top for several weeks in this space. We hope that those of you in the energy service business have taken note, raised cash, and paid off debt. We also noted the anecdotal signs of frantic activity all over Andrews from fancy pickups to folks living in motel rooms. So, let’s look at both the fundamental and technical side of what has happened in the last week.

 

As I write Friday morning August 5, crude has fallen to $85. Oil Market Fundamentals News sources around the world are broadcasting photos of Egypt’s Mubarak in his 'cage' on a gurney with cancer (we are told) on trial for his life. It is a sure bet the meaning of this photo is not lost on other Arab leaders. The only possible result is that either the current leaders will pump more oil to create programs to calm the protesting masses or those that replace the current leaders will do the same thing. Either way there can only be more oil produced in the face of falling demand. Unemployment is on the rise and people are driving less. Oil prices and demand for oil is falling as Manufacturing and Purchasing Manager Indices fall around the world. Real estate prices world-wide are floating on the sea of speculative money still sloshing around from government stimulus schemes.

The next marker to fall will be commercial and residential real estate, particularly in over heated commodity based economies like Australia and Canada. By the way, even in conservative San Antonio, the downtown office vacancy rate is 28%! Already cotton, coffee, and now crude oil prices are falling.

The next phase of the bear market, which is likely to last into 2013 will destroy the remaining existing pollyana assumptions about positive stock market returns. This will put existing pension and teacher retirement plans even further under water. All defined benefit plans make an assumption about annual returns from their investments. If the investments come up short, the provider is supposed to add to the plan to make up the difference. But, few to no providers do this! The only possible result will be to roll back existing retirement ages as well as promised benefits. More people will just continue working. This will mean fewer openings for those coming into the work force. This is ALREADY happening which is why so many college grads are moving back home. Hence the unemployment levels will continue to rise with less take home pay and therefore fewer purchases of hard goods like washing machines and automobiles.

The European reality is that it is not merely the small countries but the too big to fails like Spain and Italy that have too much debt. The Italy ETF which is EWI has lost one third of its value since May 1. This will eventually weaken the Euro resulting in demand for the US Dollar. The Dollar rallied 1.5% Thursday. Since oil prices are denominated in dollars, a stronger dollar is likely to further dampen oil prices. Patterson hit $35 in 2008; that has been our warning signal. Patterson PTEN made it to $34 and has fallen 19% in just five days. In the energy service industry, cut backs are on the way. And, the apparent salvation of the industry, natural gas, has dropped 20% since the first week of June to less than $4 an mcf. Price drops will make it difficult to support the expensive fracturing and related services that have been driving the shale gas boom.

Will gold and silver be the last refuge of safety? Yesterday GDX a bell weather gold mining holding company dropped 5.57%. Mining stocks have stubbornly refused to confirm the run up in the price of gold. So far gold is the last commodity refuge of speculators. Crude has fallen $30 or 26% from its high of $115. Yes it is oversold but trying to catch the proverbial falling knife or predict a near term price support level in a panic is a fool’s game. But frankly the absolute price level will not be driving the activity level in the Permian Basin. Expectations drive activity levels. And now the expectations, have dramatically changed from $145 oil to how low might it go.

So, once again, as was the case in 2008, we prepared you for what has happened. We hope that all in the energy service (including the bankers…) industry have taken precautionary, defensive steps to protect their business.

Now Who's Laughing?

Sat June 11, 2011

 Halliburton and Weatherford are coming to town.

In my post February 2, 2011 I suggested a tour to a foreign country, the Permian Basin. My reasoning was that oil was back on the map so to speak, this traditional venue of Texas commerce was percolating along again. This suggestion of course was met with derision, laughter, and rejection. The Business Faculty was equally disinterested in this idea. 

Now in the above link we learn that HAL has bought 150 acres, right down the road from our new campus at Brooks City Base. It was no accident that I arranged a tour of Holt CAT. They will be quite involved in this project as well. 

And Weatherford is on the way as well. 

I suggest that all re consider my suggestions regarding the importance of the Shale Gas find in South Texas as well as learning more about the oil and gas business in Texas. I wrote the business / oil and gas weekly newspaper column for the Odessa American for five years and continue to write for the Andrews County News. Andrews is one of the top five oil producing counties in the state.