Positive Energy

By now, late September of 2018, it has become increasingly evident that something big is about to happen. What exactly that may be is anyone’s guess.  But, whatever it is, we suggest you prepare for it now… before it is too late.

 

Art auction energizer: Norman Rockwell’s portrait of John Wayne. You can’t go wrong shelling out top dollar for me, pilgrim, can you? [PT]

 

Several weeks ago, if you haven’t heard, an undisclosed rich guy enthusiastically bid up and then bought Norman Rockwell’s portrait of John Wayne for a cool $1.49 million at the 12th Annual Jackson Hole Art Auction. According to auction coordinator  Madison Webb, “There was a really positive energy in the room.”

Indeed, it takes a lot of really positive energy – and a healthy bank account – to shell out that sum of money for a painting of “The Duke.”  Still, positive energy, like good weather, can quickly turn negative. Soon enough, we suppose, the purchaser’s excitement will transform into a serious case of buyer’s remorse.

Of course, we could be wrong.  The buyer could have a special liking for old John Wayne movies.  Perhaps he’s a collector of Norman Rockwell paintings.  Or maybe he won the lottery and is compelled to burn through his winnings in odd and outlandish ways.

What this has to do with anything is a bit of a stretch.  But art, if this qualifies as such, offers a rough barometer of social mood (see:  The Bubble in Modern Art). Moreover, when the price for a painting of a 20th century actor pretending to be a 19th century character of American nostalgia sells at nearly a million and a half bucks, we suspect something more is at work.

 

Sanctions and Bottlenecks

Take oil, for instance.  The price of WTI crude oil is back above $70 a barrel. Brent crude trades at over $80 a barrel.  Aside from a brief price spike at the beginning of summer, oil hasn’t been this high since its price collapsed in late 2014. What gives?

 

WTIC and Brent, daily (continuous contract charts): note the recent “double divergence” in prices.  This is quite an interesting development, because these are the first price divergences between the two types of crude oil since the rally began in early 2016 from below $30/bbl. Every other interim high was “confirmed”, this is to say a new highs in one oil type always coincided with new highs in the other. Note that there was a non-confirmed new low in the correction that ended in the summer of 2017 – this non-confirmation at a low was immediately followed by the strong rally that is still underway. However: crude oil futures remain in backwardation, a bullish factor that has hitherto kept the uptrend alive, despite speculators holding truly huge net long positions in both WTIC and Brent futures for almost a year (in excess of 600,000 contracts net in WTIC futures). This large one-sided position makes the market vulnerable, but as long as backwardation persists, rolling long positions over remains a profitable proposition. It remains to be seen whether the recent price divergences will actually turn out to be meaningful. [PT]

 

To begin with, oil markets are notoriously cyclical.  Production and consumption rates often crisscross in short succession.  Oil prices swing wildly to both the upside and the downside as supplies shift from gluts to shortages and back again.  But that’s not all…

In addition to regular supply and demand dynamics, oil markets are also subject to extreme government intervention.  Specifically, the Organization of Petroleum Exporting Countries (OPEC) – a 14 nation cartel, which often works in concert with Russia – colludes to fix the price of oil to its liking.

 

OPEC press conference. It is hard to say how much influence on prices the cartel actually has. After the 1980 oil price peak, oil production in non-OPEC countries was ramped up enormously, which undermined OPEC’s power to such an extent that it had to watch helplessly as prices collapsed by almost 75% over the next 20 odd years. The fact that Russia is cooperating with OPEC these days has strengthened the cartel’s hand somewhat, but the surge in US shale oil production has offset this effect to some extent. [PT]

 

As far as we can tell, a combination of factors could push the price of oil up much further from here. These factors include U.S. sanctions on Iran’s oil exports and bottlenecks in delivering U.S. shale oil to market. In addition, and despite President Trump’s cajoling, OPEC has only hesitantly hinted at increasing its oil production.  Bloomberg  reports:

 

“Major oil trading houses are predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.

“With Brent crude already jumping to an almost four-year high on Monday, that’s exactly the kind of price surge President Donald Trump has been seeking to prevent by pressuring OPEC to raise production.  Yet the cartel and its allies gave mixed signals at a meeting in Algiers on Sunday, ultimately showing little sign they would heed U.S. demands to rapidly push down crude prices.”

 

Oil Mania Redux

Yet for every opinion there is a counter opinion.  An argument that goes counter to another reasoned argument.  Taken by itself, each argument stands on its own rationale.  Taken together, they contradict each other.

For example, petroleum geologist and oil analyst Art Berman believes rising oil prices will be short-lived.  According to Berman, a metric he calls comparative petroleum inventories, which compares inventory data to the five year average for any given week, crude supplies will soon move back into surplus.  After that, oil prices will fall.

 

Commitments of traders in WTIC futures: hedgers currently hold a net short position of roughly 600,000 contracts, which is mirrors the speculative net long position (including non-reportable/small spec positions). Large speculators have pulled back a bit recently, from around 700,000 contracts net long to the current 560,000 contracts net long position. It is interesting that this has happened during a rally. We have seen similar behavior in the final stages of major rally legs in a number of commodities (including oil) in the past. Note that the final upward spike into the 2008 top in crude oil was mainly driven by a few commercial hedgers becoming unable to post enough margin to maintain their positions. A large Asian bunker oil storage company eventually went bankrupt when it could no longer keep up – and this bankruptcy effectively top-ticked oil prices at the time, with WTIC futures rallying by around $10 in a single trading day when the positions of the company were closed out by margin clerks. [PT]

 

Who is right?  Who is wrong?  Is oil going to $100 or $50 a barrel?  Surely, time will tell. Here at the Economic Prism we will refrain from making an oil price forecast.  However, we will offer one constructive anecdote.

If you recall, back in June 2008, Brent crude spiked up to nearly $150 a barrel. At the time, many intelligent people claimed we had hit peak production, and that prices would continue to go up forever. Speculators chased prices higher reinforcing the popular peak production theory.  Then, over the next six months or so, oil prices collapsed along with stocks and real estate.

 

“Peak Oil” – a Club of Rome scarcity meme that is revived every time nominal oil prices rise – which usually happens in concert with periods of excessive money printing. Then it is time to write and sell books about the impending catastrophe, which has the same record of predictive accuracy as the original Malthusian thesis on overpopulation, or the countless predictions made by climate scaremongers since the late 19th century, namely zero. Note: Malthus’ belly-aching about overpopulation may have had some merit in pre-capitalistic times, but with the adoption of capitalist modes of production it has not just become obsolete, it has actually become the opposite of the truth. We like the “Peak Everything” book title best, as a marker of “peak hysteria”. What the scarcity scaremongers never take into account are the economics of resource extraction and human ingenuity – and these are decisive oversights. [PT]   

 

The point is, sometimes prices move according to the fundamentals of supply and demand. At other times they become disconnected from the fundamentals entirely. During a speculative mania, decisions are guided by emotions rather than logic.

At the moment, the markets seem poised for something big. You can sense it. The Fed continues to tighten the federal funds rate. The yield on the 10-Year Treasury note is holding above 3 percent. Emotions continue to strengthen their grip on the markets.

Certainly, the time seems right.  Markets are ripe.  What better vehicle than oil to provide an epic parabolic price spike and crash?

 

Charts by stockcharts, sentimentrader, EIA

 

Chart and image captions & edits by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Oil Mania Redux”

  • utopiacowboy:

    It’s hard to know if it will go higher from here but I hope it does. It would be great if it goes to $200 a barrel and completely craters the US economy. This balloon needs a needle for it to explode.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • A Surprise Move in Gold
      Traders and Analysts Caught Wrong-Footed Over the past week gold and gold stocks have been on a tear. It is probably fair to say that most market participants were surprised by this development. Although sentiment on gold was not extremely bearish and several observers expected a bounce, to our knowledge no-one expected this:   Gold stocks (HUI Index) and gold, daily. As noted in the annotation above, a Wells Fargo gold analyst turned bearish at the worst possible moment...
  • May Away
      May Gone in June... Yes, now that June is here, it is indeed the end of May. Theresa May, to be precise, the henceforth former British Prime Minister. After delivering her unparalleled masterclass in “how to completely botch Brexit”, British cartoonists are giving her a well-deserved send-off, which we are documenting below. But first, in case you don't know anything about Ms. May's heroic “Brexit”-related efforts, here is an explanation of how she tried to finagle the best...
  • US Money Supply Growth and the Production Structure – Signs of an Aging Boom
      Money Supply Growth Continues to Decelerate Here is a brief update of recent developments in US true money supply growth as well as the trend in the ratio of industrial production of capital goods versus consumer goods (we use the latter as a proxy for the effects of credit expansion on the economy's production structure). First, a chart of the y/y growth rate of the broad US money supply TMS-2 vs. y/y growth in industrial & commercial loans extended by US banks.   At...
  • Elizabeth Warren’s Plan to Bamboozle American Voters
      A Plan for Everything! The run-up to the presidential primaries offers a funhouse reflection of American life.  Presidential hopefuls, hacks, and has-beens turn to focus groups to discover what they think the American electorate wants. Then they distill it down to hollow bumper stickers. After that, they pump their fists and reflect it back with mindless repetition.   A plea for clemency from Mr. 1/1024th crow. [PT]   Change We Can Believe In.  Feel the...
  • The Ugly End of Globalization
      The Ugly End of Globalization Sometime in the fall of 2018 a lowly gofer at the New York Stock Exchange was sweating  bullets.  He had made an honest mistake.  One that could forever tag him a buffoon.   Art Cashin the living hat-stand, going through a succession of DJIA milestone hats. He promised was going to crack a smile for the Dow 27,000 hat photo, alas, it was not to be. [PT]   After trading sideways for most of the spring, the Dow Jones Industrial...
  • Gold vs. Silver - Precious Metals Supply and Demand
      Is Silver Still Useful as a Monetary Metal? The price of gold jumped a whole twenty bucks last week. We imagine that the marginal gold bug is relieved to be rid of his gold, in this opportunity afforded by the highest price since early April. OK, all kidding aside, the price of silver went up a penny.     The gold-silver ratio keeps hitting new highs recently (this is actually a long-term trend, frequently interrupted by strong rallies of silver against gold). Is silver...
  • Fed Chair Powell’s Plan to Pickle the Economy
      A Loose Relationship The Dow Jones Industrial Average made another concerted run at the elusive 27,000 milestone over the last several weeks.  But, as of this writing, the index has stalled out short of this psychosomatic barrier.  By our estimation, this is for the best.   Since early 2018 the DJIA has gone nowhere, albeit in interesting ways... [PT]   While not always apparent, the stock market generally maintains a loose connection to the underlying...
  • The Italian Job - Precious Metals Supply and Demand
      Lira Comeback? The price of gold jumped 35 bucks last week, and that of silver 48 cents. The dollar is now down to 23 milligrams of gold. Keith is on the road this week, so we will just comment on one thing. If Italy is serious about moving back to the lira, that will make the euro less sound (to say nothing of the lira). That will drive people mostly to the dollar, but also to gold.   Italian deputy prime minister Matteo Salvini (as the leader of the Lega party he is...
  • Paul Tudor Jones Likes Gold
      Gold is Paul Tudor Jones' Favorite Trade Over the Coming 12-24 Months In a recent Bloomberg interview, legendary trader and hedge fund manager Paul Tudor Jones was asked what areas of the markets currently offer the best opportunities in his opinion. His reply: “As a macro trader I think the best trade is going to be gold”. The relevant excerpt from the interview can be viewed below (in case the embedded video doesn't work for you, here is a link to the video on...
  • Bitcoin: What is the Best Day of the Week to Buy?
      Shifting Patterns In the last issue of Seasonal Insights I have discussed Bitcoin’s seasonal pattern in the course of a year. In this issue I will show an analysis of the returns of bitcoin on individual days of the week.   Bitcoin, daily – since bottoming in early December, BTC has advanced quite a bit. It remains an excellent trading sardine. [PT]   It seems to me that Bitcoin is particularly interesting for this type of study: it exhibits spectacular price...
  • Silver Remains a Monetary Metal - Precious Metals Supply and Demand
      Silver Price Driven by Reservation Demand The price of gold went up a buck last week, but the price of silver dropped back 13 cents. And the gold-silver ratio marches further upwards. Keith spoke at a conference this week, about how to analyze the fundamentals of supply and demand in gold and silver. He talked about the basis of course.   Silver coins – silver prices are partly influenced by an industrial demand component, but the fact that they move most of the time with...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!