Here Comes The Double Dip Pt. 3

[dolanbaker]

I wonder why this energy boom has resulted in extremely high prices for oil. Maybe if we didn't drill the price would go down.

Actually, it *has* resulted in lower oil prices - relatively speaking. Why do you think WTI is trading at a $18 discount to Brent?

That's only because the "surplus" oil is marooned in the middle of the US where the population is relatively sparse, if it could be transported and sold elsewhere, it would be around $125 a barrel just like the other main benchmark oils.

[OilFinder2]

That's only because the "surplus" oil is marooned in the middle of the US where the population is relatively sparse, if it could be transported and sold elsewhere, it would be around $125 a barrel just like the other main benchmark oils.

No, it would still be cheaper. You'd probably have a more uniform US price somewhere intermediate between current WTI and Brent - a discount of maybe $9 instead of $18.

[dolanbaker]

That's only because the "surplus" oil is marooned in the middle of the US where the population is relatively sparse, if it could be transported and sold elsewhere, it would be around $125 a barrel just like the other main benchmark oils.

No, it would still be cheaper. You'd probably have a more uniform US price somewhere intermediate between current WTI and Brent - a discount of maybe $9 instead of $18.

When carrrying capacity of the pipelines > surplus supply = the selling price will be at the Brent (world) price,
If an oil producer can get the international price why the hell would he sell it cheaper to the locals!

[peripato]

Or maybe ...

CITI: The US Energy Industry Is Going To Grow So Fast, It Will Spark A New 'Industrial Revolution'

Oil and gas production in the United States and North America is going to skyrocket in the next 8 years due to strides in natural resource extraction, write Citi analysts in a report published yesterday. In fact, they went so far as to call North America "the new Middle East," at least in terms of oil production.

This—as well as a trend towards declining U.S. energy consumption—will completely transform both the domestic economy and the threats the U.S. will face in the future,

[...]

This energy boom would have a transformative effect on the domestic economy. Here are just a few of the most astonishing consequences in a "good-case" scenario:

* Citi analysts expect real GDP to increase by 2.0 to 3.3 percent—$370 to $624 billion—as a consequence of new production, a decline in energy consumption, and the economic activity generated along with this.

* 3.6 million new jobs could be created by 2020 as a consequence of increased energy production. Of those new jobs, some 600,000 would probably be devoted to oil and gas extraction while 1.1 million would be generated to meet demand in related industrial and manufacturing sectors.

* National unemployment could subsequently decline by up to 1.1 percent.

* The current account deficit could shrink by 80 to 90 percent due to energy exports at an already low level of production. Citi analysts predict that the current account balance could move from -3.0 percent of GDP to -0.6 percent of GDP by 2020.

* The value of the dollar could jump by 1.6 to 5.4 percent, primarily based on changes in the current account balance.

* What's more, risks to the U.S.—in particular, geopolitical risks—would dramatically decrease. A domestic or continental energy boom would diminish the importance of conflict within and tensions involving the Middle East, as the U.S. would become significantly more energy independent.

* Finally, Citi analysts note that this could lead to a considerable decline in oil prices.

[...]

Very funny stuff there, OF.

From what I have read, constantly higher prices are supporting the tedious effort of squeezing the oil equivalent of blood from a stone (<100 b p/d, per well in N. Dakota; average), as thousands of rigs, previously allocated to shale gas, drilled so much of it, the effort crashed the price! So, companies, in desperate need of new vistas are busily transferring those rigs and crews to the existing Texas and N. Dakota shale oil plays.

However, the higher the price of oil goes, the sooner it will short-circuit the economy, again, curtailing demand and crashing the price, just as it did in 2008 - putting an end to the great shale oil bubble, just as the natural gas bubble ended for similar reasons. Only a matter of time.

[Daniel_Plainview]

Crude Oil is Going to $500 a Barrel (Part 1)

Now that’s a headline grabber! Quantemonics Investing (QI) is projecting US$500 a barrel for crude oil in 8 years, basically compounding at the same rate as it has since 1999, between 2012 and 2020. During 1999 the price for a barrel of oil was $10. Today it goes for $110-$130. Anybody predicting $100 a barrel for 2011 back in 1999 was considered a crackpot lunatic, and I am sure many reading this will say the same about such a ludicrous “prediction” of $500 in the not too distant future.

...Three undeniable variables are pushing oil prices higher and higher each year, and will not change much in the immediate future: [1] Record money printing by the FED and central bankers across the globe; [2] the Peak Oil supply phenomena (which basically explains why the world is running out of this important nonrenewable energy resource); and [3] increasing levels of political chaos, revolution, civil disobedience and outright war between nations in the largest oil supply region of the Middle East are all pushing the envelope in supply/demand balance. For most of 2011 and 2012, the world has been running a deficit in crude oil supply vs. demand of at least 500,000 barrels a day (U.S. Energy Dept. estimate), and this is before any increase in demand from economic growth or a supply shock from war with Iran. Plus, the International Energy Agency is worried that necessary long-term investments in oil production and infrastructure are lagging mushrooming demand on the planet.

Record money printing from 2008-2012 in the world continues unabated, with the U.S. monetary base and M-1 money supply measures still rising at banana republic rates of +20% year over year in February 2012, three years AFTER the economic crisis bottom in the financial markets. The root cause, foundation if you will, of the rise in oil (alongside other commodities) since 2009, is the truly insane and counterproductive base money creation and devaluation of the once almighty U.S. Dollar by the Federal Reserve. If you want lower oil and gas prices, you need normal levels of money printing and “real” interest rates HIGHER than the honest consumer inflation rate of +5% annually in early 2012. (I could stop here, because a normal level of money printing the last three years would have likely kept oil near the early 2009 number of $45 a barrel.)

Then you have the Peak Oil problem. Once we pump oil reserves out of the ground and burn them to produce energy, they don’t come back! Oil resources are extremely limited and becoming more so as the emerging economies like China and India continue to grow strongly. Mathematically the supply of oil is not keeping pace with steady increases in demand, and the cost to find and pump new oil reserves is skyrocketing from its scarcity. Today we have to crush rocks and squeeze sand and drill 4 miles under sea level to find significant reserves. Then what will we do when these run dry? Just last week ExxonMobil (NYSE: XOM) announced they will produce less oil in 2012 than 2011, and they employ a growth oriented business model! Even with high oil prices as incentive, it is getting harder and harder to find new oil reserves that can be exploited for profit, since the cheap oil on the planet is now GONE. If you are an optimist on economic growth in the world, you will have to deal with the devil of skyrocketing oil and gas prices, pure and simple. That’s the math - I cannot change the facts. Going forward, rising demand and stagnant supplies will force prices higher, basic economics at play, if you want new reserves to be found and pulled up from the deep.

... One fallacy floating around Wall Street currently is the price of oil “cannot” rise further because it would slow demand dramatically. History says otherwise. Several Middle East wars and crisis supply shocks made for political reasons against western economies caused the price of crude oil to climb from $3 a barrel to $40 between 1973-81. During this span there were two rapid spikes in price of better than 200% over less than a year. The 1990 Iraqi invasion of Kuwait and U.S. response to repel Iraq, forced a rise in global oil prices of nearly 200% in four months! Truly inelastic demand for oil and energy is the reason. The economy will slow down from related dislocations to disposable income and a rise in inflation. Yes, it will even slip into recession. However, I have confidence the Federal Reserve will swoop down and double or triple the banana republic rate of money printing to ease the pain of our $200 a barrel target price for 2012-13 (triple the $75 low in October 2011), and allow the overall CPI inflation rate to skyrocket past 10% later in 2012-13. FED Chairman Ben Bernanke loves to print money, like it grows on trees, and he cannot wait for another crisis to save U.S. all. (Nevermind the coming spike in interest and inflation rates from oil’s climb will make Uncle Sam’s $18 TRILLION in debt rollovers impossible to refinance. I will leave the Treasury’s out-of-control structural deficit financing problem for future blogs. I wrote a little article on Motley Fool in December 2009 on How to Fix America - nobody listened.) ...

[Daniel_Plainview]

Crude Oil is Going to $500 a Barrel (Part 2)

Today crude oil and related oil producing assets are substantially “undervalued” and misunderstood by Wall Street analysts and main street investors. With seemingly high prices for crude oil and refined products like gasoline, widespread disbelief exists that oil can climb yet higher. On the contrary, the sheer size of record money printing by the U.S. Federal Reserve and a lack of understanding of the Peak Oil problem presently give petroleum quotes a solid foundation to rise markedly in 2012-13, based on our work. We are confident a combination of factors will propel crude oil to US$500 a barrel before the year 2020.

Please read our Crude Oil is Going to $500 a Barrel (Part 1) article explaining the elementary arguments for ever rising energy pricing going forward...

Whether it’s the backwardation of futures pricing for crude oil, or well below S&P 500 average valuations for Oil companies with P/Es of 8-12 “trailing” after-tax profits, Wall Street conventional wisdom expects oil quotes to FALL appreciably from US$105 a barrel in 2012-13, not RISE toward $200. Yes, the price of crude oil has risen a remarkable 900% since the 1999 ultra-low price of US$10 a barrel. However, commodities in general are 5-10 times the pricing of 1999, with hard money substitutes for paper currency like gold 500% and silver 800% higher the last 13 years.

Let’s compare the relative pricing of the two most important commodities on the planet, gold and oil. Specifically, gold is the ultimate hedge against inflation (reckless money printing) and “the” hard currency of choice throughout human history, while oil has been “the” engine fueling the movement of people, goods and economic growth the last century. Believe it or not, today’s US$1700 gold divided by US$105 crude oil price is right at the post World War II average ratio of 16. During 2005, the Gold/Oil Ratio was as low as 7 (equal to $240 crude oil per barrel at $1700 gold an ounce). Considering the high odds of a war shock to oil supplies coming soon, and the problems associated with Peak Oil supply already biting the oil market, any number remotely near the 70-year average should be viewed as a LOW price, not a high one, in our humble opinion!

Another relative value indicator to compare is the Dow Industrial price versus a barrel of crude oil. Today the Dow/Oil Ratio is around 123 (13,000 Dow/ US$105 crude oil). The average since leaving the gold standard in 1971 is 140, and if you exclude the stock market boom years of 1995-2005, that average is closer to 80. By this measure oil is again fairly valued to UNDERVALUED in early 2012. The 1974 Arab oil embargo low ratio was 40, the 1981 all-time low was 25 from the Iran-Iraq war, and the 1990 oil spike from Iraq invading Kuwait produced a 50 number. Assuming the stock market stays close to current pricing, there is plenty of room for oil to rise 50% or even 100% in price in 2012-13, especially if a new Middle East war with Iran erupts. How high could petroleum prices climb under a worst case scenario disruption of supply from the Middle East? To reach the 25 all-time low ratio (or all-time high valuation of oil vs. stocks), stock market wealth levels right now would require a rise above $500 a barrel in crude oil!

Of particular interest to investors in 2012, Oil company valuations do not discount or anticipate ANY potential rise in oil/gas prices going forward. They are quite inexpensive on a relative basis to current earnings and cash flows historically, including comparisons to the alternative stock investments you could make in the S&P 500 average company, and yields in the bond market. At this point they offer substantial upside, above and beyond a significant and sustainable advance in raw energy commodity prices in the future. At US$200 crude oil in 2013, most of the oil assets we hold in the Relative Value portfolio could be “returning” 20%-40% annually in after-tax free cash flow, on our invested dollars today. Where else in the marketplace can you find safe, risk-adjusted returns close to this potential? ...

[OilFinder2]

We shall find out in due time whether WTI, Brent, or something in-between is the more accurate price for North American crude. In the meantime, back on topic ...

U.S. jobless claims fall 5,000 to 348,000: Applications for benefits at lowest level since February 2008

Applications for weekly unemployment benefits set a new four-year low, the government reported Thursday, in another sign that the U.S. labor market continues to gradually improve.

Initial claims fell by 5,000 to a seasonally adjusted 348,000, the lowest level since February 2008, the Labor Department said.

Claims from the prior week were revised up to 353,000 from an original reading of 351,000.

The level of claims is an indicator of whether layoffs are rising or falling. Economists surveyed by MarketWatch had estimated claims would rise to 353,000 in the week ended March 17.

The four-week average of claims, meanwhile, dipped 1,250 to 355,000, just slightly above a four-year low. The monthly average provides a more accurate view of labor-market trends by reducing week-to-week volatility caused by seasonal quirks.

New applications for benefits fell below the key 400,000 threshold in the first week of January and have remained there ever since. Lately claims have settled in the 350,000 range, a level typically associated with above-average job growth.

[...]

[OilFinder2]

US Leading Economic Index Rose 0.7% in February

A gauge of future U.S. economic activity compiled by the Conference Board posted a fifth straight monthly increase in February, climbing a healthy 0.7 percent in a sign of gaining economic momentum.

The group's Leading Economic Index was up to 95.5 in February on gains that were described as broad-based and potentially signaling more progress on jobs, output and incomes in coming months.

"We haven't seen this kind of a run since we were coming out of recession in 2009," Conference Board economist Ken Goldstein said.

Click here for a nice chart.

[Daniel_Plainview]

"Whole Load of Airlines are Teetering on the Brink"

Emirates, the biggest airline by international traffic, said more carriers will go bust this year as fuel costs and sluggish economies undermine profitability.

“We can reel off a whole load of airlines that are teetering on the brink or are really gone,” Tim Clark, the Dubai-based carrier’s president, said in an interview. “Roll this forward to Christmas, another eight or nine months, and we’re going to see this industry in serious trouble.”

Airline profits will plunge 62 percent in 2012 to $3 billion, equal to a 0.5 percent margin on sales, as oil prices rise, the International Air Transport Association said this week. Emirates’s fuel bill accounts for 45 percent of costs and may jump by an “incredibly challenging” $1.7 billion in the year ending March 31, according to Clark, who says he’s sticking with a no-hedging strategy rather than risking a losing bet.

[Daniel_Plainview]

Eurozone slides back into recession as output falls at stronger rate in March

The Markit Eurozone PMI® Composite Output Index fell from 49.3 in February to a three-month low of 48.7 in March ... The latest reading signals a contraction in business activity for the second successive month, and the sixth decline in the past seven months.

Output fell on average over the first quarter of 2012, albeit to a lesser extent than in the final quarter of 2011. Nevertheless, the PMI therefore suggests that the Eurozone has slipped back into a technical recession, defined as two consecutive quarters of falling output.

Both manufacturing output and service sector activity contracted in March, showing the worst performances for three and four months respectively. However, in both cases, the rates of decline were only very modest.

Output rose in Germany, but the rate of growth slowed to a three-month low to show only a marginal gain. Output meanwhile fell slightly in France for the first time in four months, and dropped sharply again in the rest of the region.

[Daniel_Plainview]

Eurozone 'poster child' Ireland slumps back into recession

The Central Statistics Office (CSO) said that Irish gross domestic product (GDP) shrank 0.2pc in the fourth quarter after a contraction of 1.1pc in the third quarter, putting the country back into a technical recession.

Worse, the Irish gross national product (GNP) plunged 2.2pc in the fourth quarter after a 1.9pc decline in the previous three months. GNP is regarded by the Irish government as a more accurate barometer of the country's economic performance as it strips out substantial profits earned by multi-national companies in Ireland that are then taken out of the country. The CSO said the Irish economy grew by 0.7pc for the whole of 2011. But it shrank by 2.2pc in GNP terms.

Ireland, which received an €85bn (£71bn) international bailout in 2010, has won plaudits from eurozone members for its implementation of tough spending cuts and austerity measures.

European leaders, including Angela Merkel, the German Chancellor, have held up the country as a poster child for other "sinner states" to copy. At the World Economic Forum in Davos in January, Jyrki Tapani Katainen, the prime minister of Finland, said: "The Irish model [of recovery] is the one we all need. I don't see that we have any choice… there is no short cut to heaven."

[Daniel_Plainview]

Student-Loan Debt Tops $1 Trillion

The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery, U.S. officials said Wednesday.

Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

The new figure—released Wednesday at a banking conference in Austin, Texas—is a preliminary finding from a study of student debt that the bureau plans to release this summer. Bureau officials said the estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports.

CFPB officials say student debt is rising for several reasons, including a surge in Americans going to college in recent years to escape the weak labor market. Also, tuition increases—which many colleges say are needed to offset big cuts in state funding—have many students taking out bigger loans.

In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, bureau officials said. New York Fed data show that as many as one in four student borrowers who have begun repaying their education debts are behind on payments. ...

[OilFinder2]

Consumer Optimism for U.S. Outlook Hits Eight-Year High: Economy

The number of Americans saying the U.S. economy is getting better rose in March to the highest level since 2004 as a decline in claims for unemployment benefits offered more evidence of a labor-market recovery.

Thirty-four percent of respondents to Bloomberg’s monthly consumer expectations survey said the economy was improving, the largest share since January 2004. The pickup boosted the monthly expectations to the highest in a year. Figures from the Labor Department today showed jobless claims decreased by 5,000 to 348,000 in the week ended March 17, the fewest since February 2008.

The best six months of job growth since 2006 are boosting the optimism of consumers whose spending accounts for 70 percent of the economy. Another report today showed the index of leading indicators rose in February by the most in 11 months, signaling the U.S. expansion will strengthen, helping to sustain global growth as China slows and Europe threatens to sink into a recession.

“The economy will be gradually building up momentum going forward,” said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut. “We will be shouldering a little bit more of the burden given the slowdown in Europe and some degree of slowing in emerging markets.”

[...]

[Daniel_Plainview]

Plunging to $150K, New One Family Homes For Sale in the US Craters

[OilFinder2]

Here is the correct graph ("sold," not "for sale"). It's still in the dumps, but has clearly bottomed and is edging up.


link

[Armageddon]

Edging up ?

[vision-master]

Like a knife..........

[kublikhan]

The U.S. housing market contains a nearly $4 trillion-dollar negative equity hole. The Fed Bank economist said it would take $3.7 trillion, much more than the $25 billion mortgage servicing settlement and other federal housing initiatives, to get homeowners with mortgage debt back to preferred loan-to-value ratio levels. He says that amount makes other federal initiatives launched to band-aid the housing market so far look like "peanuts" in comparison.

Emmons' data estimates the average LTV for those with mortgage debt is currently 94.3%. That compares to preferred LTV levels among mortgage debt holders of 58.4%, which was the average struck among mortgaged homeowners in the period stretching from 1970 to 2005. Emmons told the crowd there is no easy way to fill that gap, and the deep hole is hardly discussed among the media and policymakers. "We are sort of stuck in this," he told the crowd. "It's a sweat box we're in, and we can't get out. We are not talking about this very much … it's just too ugly."

Emmons said the only viable option to narrow the gap is letting home prices fall until they eventually reach levels that entice buyers, bringing private capital back in. With that in mind, the only alternative is that we have "millions of weak homeowners exit, replaced by new private owners with equity to recapitalize the housing sector."

Emmons said that option will still be painful since he believes another 20% reduction in home prices is needed to attract new buyers. "The asset class is not priced attractively yet," Emmons said. "You need to get the value down to where it looks like a screaming buy."

Negative equity gap nears $4 trillion

[Daniel_Plainview]

The Housing Nightmare

Despite unprecedented intervention, including the complete socialization of the U.S. mortgage market (99% of all mortgages are guaranteed by the Federal government) and the socialization of subprime market for poor credit risks (3% down and easy credit from FHA), the above chart punctures the happy-talk illusions of a rebound in housing.

Credit-asset class bubbles cannot be reinflated because they follow an S-curve. No matter how much taxpayer money the Federal government throws into the housing market, it will not reinflate. The financialization (credit/leverage bubble) of housing follows an S-curve as a system, and tweaking the parameters of the inputs (lowering interest rates, buying up toxic mortgages, etc.) doesn't change the curve.

Hubris-soaked central Planners are incapable of understanding that their numerous policy interventions have essentially zero impact on the curve. But if you can't believe systems don't respond to frantic policy measures, then consider these factors:

1. Tens of millions of households are too poor to buy a home (the FDIC calculated 40% of the U.S. households have insufficient income and credit to buy a home) without massive subsidies, and with no skin in the game their purchase is basically a lease with an option to sell later for a private gain at the expense of the government.

if it doesn't work out then it's last one on, first one off: they default with little loss and possibly much to gain, i.e. two years living rent-free in a not-yet foreclosed house.

2. Tens of millions of other households are drowning in underwater mortgages they can afford to pay (barely) but that have crippled their net worth and borrowing power. They are out of the housing market except as potential defaulters.

3. Millions of other credit-worthy buyers have woken up to the fact that buying a house is a form of consumption and a risky "forced savings" investment, as property taxes spiral ever higher and prices continue sagging in many markets. The risk is high and the potential gain is uncertain.

Those snapping up housing for cash are either buying to rent the homes or to speculate that a resurgent housing market will arise and they can "flip" for big profits. This segment simply isn't large enough to soak up all the millions of homes languishing in the "shadow inventory" of homes being held off the market in the vain hope prices will bubble higher.

[Daniel_Plainview]

Trichet warns of nations’ ‘behavioral contagion’

WASHINGTON (MarketWatch) — Jean-Claude Trichet, the former president of the European Central Bank, said Saturday that he is worried that controversial quantitative easing and other nontraditional steps that global central banks have taken since the financial crisis could be here to stay.

The Fed has purchased $2.3 trillion of securities since it cut interest rates to zero in December 2008 in a bid to bring down long-term interest rates and boost economic growth.

These actions have led to criticism, especially during the early days of the Republican contest for the 2012 presidential nomination, that Fed Chairman Ben Bernanke was undermining the dollar and creating conditions for a sharp rise in inflation.

In the past few months, the ECB has provided a trillion euros in cheap loans to European commercial banks. Some economists believe the liquidity could fuel inflation. ... Trichet said ... that the extraordinary actions [could] be part of a new “permanent regime.”

Trichet said financial markets around the world now have access to same information instantaneously.

Those factors may have created the permanent risk of “behavioral contagion” or a grave and immediate threat to the systemic functioning of the financial system, similar to the market meltdown in the wake of the collapse of Lehman Brothers.

If this is the case, then central banks would have to stand guard against that risk, and be willing to counter it, Trichet said.

“I hope I am plain wrong but I think we have to reflect on that,” Trichet said.

“Nobody would have expected such a long time after Lehman Brothers, [central banks] would continue to have this level of expansion of our balance sheets,” he said. “We are all still in crisis.”

This behavioral contagion is 100% certain to persist as long as real, organic growth fails to materialize. But you can't have growth with Brent crude at $125/bbl.

This sucker's going down.

According to Mish:

Who was it that started ECB bond buying? Why it was none other than Jean-Claude Trichet, acting against the advice of Axel Weber, German central bank president who resigned in protest rather than be part of the operation.

With the default of Greece, Trichet's bond-buying spree blew up in the ECB's face and so too will the ECB's buying of Portuguese and Spanish bonds.

Ultimately we are headed for a global currency crisis. Central banks headed by Greenspan, Bernanke, Trichet, and Draghi paved the way.

When the currency crisis takes over, the price of oil will skyrocket, and all Western economies will collapse.