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Recovery?
How Wall Street Will Kill the Recovery
Wall Street is taking much of its federal money and using it to again speculate in the oil market. That's bad for everybody
By Ed Wallace
Wall Street is up to its old tricks again.
One year later, one of the key excesses that led our consumer-based economy into an historic downturn is being abused in the exact same way that got us $147-a-barrel oil last summer. Worse, many in the media are again getting the facts wrong on oil prices and demand—as if the ~~explosion of 2005-2008 never happened—as one look at last week's oil report will verify.
Forget what Cambridge Energy Research Associates reported on Oct. 13. By its calculations oil demand actually peaked in 2005 among the industrialized members of the Organization for Economic Cooperation, while in the U.S. alone oil usage has dropped by 2 million barrels a day compared with 2005. But remember these facts: As of this writing, U.S. supplies of refined distillates, including diesel, heating oil, and aviation fuel, are at a 25-year high. We have 29.56 million more barrels of oil in our inventories than we had the same week a year ago, and refined gasoline on hand is up 16.37 million barrels for the same period. And this does not include the 125 million barrels of oil that the Secretary General of OPEC says are being held offshore in tankers.
Skewing in Public
In fact, the market is skewed by the high inventories of refined products. Last week, the Energy Information Administration showed that refinery utilization rates fell by over 4%, to 80.9%, yet oil jumped $2 a barrel on the news that our gasoline inventories fell by 5.2 million barrels.
That was the dark side of the futures market making its move: Oil should have fallen just because, according to the American Petroleum Ins ute, refinery crude runs fell by 511,000 barrels per day (validating that 4% drop in utilization). In short, refineries determine oil demand, and in that week demand for more oil was off substantially—yet the market bid crude up.
It is true that this time of year usually sees some refinery maintenance. But, as Truman Arnold trader Tom Knight wrote, "Though [refiners] say this is planned maintenance, we hear it is primarily motivated by very poor refining margins [and] the collapse of the sweet/sour crude spreads." Referring to "ongoing problems at the Delaware City [Del.] refinery," Knight gets the sense that this may be "the precursor to a permanent closure of that refinery." Basically, of course, overall demand for finished oil products is so weak and inventories so high that the "crack spread," or refinery profit, is virtually nil.
IEA Gave Us the Facts—Late
This inconvenient truth is merely another strong indication that the retail market demand for refined goods doesn't come anywhere near justifying the market price for crude. Therefore, oil is back to being severely overpriced. This assessment was validated on Oct. 7, when Forbes published these facts: Demand for diesel and heating oil has fallen by 9.5% in 2009; aviation fuel use is off by 3.3%; and the only positive sign was gasoline usage up by 6.2%. Of course, that's "up" compared to last year, when the price of gasoline soared past $4 a gallon during the peak driving season, severely depressing gasoline demand—but now we find problems with the 2008 reporting on energy.
We were given a clue in a report that the International Energy Agency issued on Sept. 10, 2008, a few months after our own record prices for fuel. In it a chart, headed "North American Oil Product Demand, Change 12-Month Moving Average," showed that gasoline demand in North America actually started falling in August 2007, fully four months before the now-official start date of the recession, while diesel demand started falling two months later.
Moreover, diesel demand turned decidedly negative in March 2008, as did gasoline demand that May. This means that all the time the energy reporting was claiming that gasoline and diesel prices were going though the roof for simple supply-and-demand reasons, real world demand was falling rapidly. The oil reality was exactly the opposite of what Wall Street and other investors were telling the media.
Your Tax Dollars at Work
So demand for finished products was falling, as was demand for oil importation, yet prices nearly doubled in that period for consumers and energy-intensive industries. It is said that the world economy's collapse was caused primarily by the events of last October on Wall Street, but the oil and finished products' demand decline showed that the economy was under stress for over a year before then.
This means it is still true that most recessions since the end of World War II have been preceded by a sharp rise in energy prices.
Today we are hearing all the same fairy tales we heard last year to explain why oil has gone from $33.87 a barrel this past winter to $79.54 as of this writing. Again, the first thing blamed is the weakening American dollar against foreign currencies. But the dollar has only fallen around 15% from its peak earlier this year, while oil has risen by 231%. Shades of 2005-08.
Forgetting Recent History
Another excuse given is that oil is following the equity market, but that's not how it's supposed to work. The futures market for oil is supposed to be governed by supply and demand, not react sympathetically to speculative moves in equities. In any case, it's been reported widely this year, starting with Der Spiegel's article on July 28, that the excess liquidity put into the system by central banks worldwide, money that was supposed to be put into consumer and business loans, has once again been used for speculation and quick paper profits in stocks and commodities, including oil.
As Washington irony goes, this is a new high-water mark: They've printed money to save our financial ins utions, claiming it's there to stimulate a recovery. Yet much of that newly minted money is being used against consumers and small business owners. The money that's supposed to save them in new loans is instead increasing their energy costs through speculation, to the point of devaluing corporate earnings and personal incomes and prohibiting other purchases.
The sad truth is that if oil costs have more than doubled during a period when so little economic growth was taking place, you have to wonder how high the oil market will rise next year, when a real recovery has the chance of taking hold. In that statement lies the fact that this recovery will be stopped again.
A Tired Logic
In 1997, a financial crisis in Asia caused a local economic collapse that made itself felt in oil prices around the world. The worst devastation was limited to Thailand, Malaysia, Indonesia, the Philippines, and South Korea; the Mercedes dealership in Bangkok survived only by turning into a restaurant. And, although the U.S. and Chinese economies were rising swiftly that year, what happened to a few economies in Asia was still enough to drive the price of oil down from the mid-twenties range to around $10 a barrel, allowing gasoline to be sold in the States for 99¢ a gallon. This past 12 months a far worse financial crisis has gone global, yet the oil market has acted as if these were boom years.
Is today's stock market divorced from economic reality? Probably. It is a certainty that oil is. We know that because those in the market are still putting out the same tired and incorrect logic that they used successfully last year to push oil to $147 a barrel while demand was plummeting.
Because oil is not carrying a market price that fairly reflects economic conditions and demand inventories, overpriced energy is siphoning off funds that could be used for corporate expansion, increased consumerism and, in time, the recreation of jobs in America. Moreover, as businesses everywhere de-leverage, we are watching family incomes fall dramatically.
This puts even more pressure on incomes to pay for gasoline—not to mention the fact that buying gas with a credit card today will cost consumers more because of much higher interest rates than it did a year ago.
What Next, Washington?
High energy prices started hurting the consumer economy back in August 2007, and oil prices had caused grievous damage by the summer 2008. And apparently we haven't learned a thing from that painful experience, because we are witnessing the exact same scenario unfolding today. If it isn't corrected quickly, rising energy prices will stop whatever recovery is now beginning dead in its tracks, and if oil climbs any higher it could easily run the economy off the rails next year. One has to wonder: What will Washington's plan be then?
Note to media: When refinery runs are down 4% that means refineries are using less oil. One should quit writing that's a good reason for oil prices to go up.
Last edited by Winehole23; 10-21-2009 at 04:53 PM.
Recovery?
Yeah I really can't devote the time to reading the op since the premise in the le is false. It might be a good topic when there is a recovery.
...
Last edited by Winehole23; 10-21-2009 at 09:23 PM.
FWIW, I agree that GDP growth is an inadequate measure of recovery, but "GDP growing" is recovery in the bare technical sense.
3Q 2009 GDP estimates are positive. I seriously doubt that Bernanke would have gone out on a limb if he didn't already know the number was there.
There could be another nasty jolt that derails all the happy talk, but until it does I'll concede that there might be a grain of truth it's all based on.
Last edited by Winehole23; 10-21-2009 at 09:26 PM.
@SnakeBoy: The much ballyhooed return of GDP growth might not pan out. I think I've stressed that as much as anyone here.
Speculative distortion of energy markets has an effect on us regardless.
Remember $4 a gallon gas?
What effect might that have on an already severe recession?
I know. You're one of the best posters on the economy.
I think speculation is self limiting in our current recession which is why I think the le of the op is a false premise. I don't think we can get to $4 gas again in the current economy. I think if gas breaks $3 or so per gallon you'll see people cut back on spending even more which would send the economy further downward and oil prices will tumble once again.
I think people have changed their spending habits and Wall Street hasn't come to accept that. So I think the recent rise in oil (and the dow) will be relatively short lived. Just my opinion of course, don't ask me to prove it.
One point of the article is that gas prices are rising in the context of falling inventories right now.
Last week, the Energy Information Administration showed that refinery utilization rates fell by over 4%, to 80.9%, yet oil jumped $2 a barrel on the news that our gasoline inventories fell by 5.2 million barrels.
I don't disagree that speculators are driving up the oil price now for no valid reason. Same for wall street in general. I just don't think they can continue the trend much longer.
I'll ignore my dislike of the le and read the article tomorrow. Gotta get some sleep now.
Welcome to the hangover effects of a unregulated, trickle down economy....it's trickling down alright..in higher pump and heating prices..
Got an aspirin, Dan?
You're just adding to the headache.
Seriously, RE-regulate the markets and these problems go away...
The devil's in the details, and water seeks its level.
Seriously, RE-regulate the markets and these problems go away...
Wherever financial innovation goes, the money goes. Unless the rest of the world reregulates in concert with us, the financial hub will migrate somewhere else. Maybe it was going to anyway. I hear the hedge funds like Switzerland now.
Not that that's necessarily a bad thing. But it's not all good.
Gonna stop reading your threads WH.
Starting to actually believe I can SEE the strings attached to everyone's appendages.
This entire section completely ignores GLOBAL growth. US demand does strongly affect the overall demand for oil.
But what about economies that are still growing?
http://www.iags.org/china.htm[China's] oil consumption grows by 7.5% per year, seven times faster than the U.S.'
Growth in Chinese oil consumption has accelerated mainly because of a large-scale transition away from bicycles and mass transit toward private automobiles, more affordable since China's admission to the World Trade Organization. Consequently, by year 2010 China is expected to have 90 times more cars than in 1990. With automobile numbers growing at 19% a year, projections show that China could surpass the total number of cars in the U.S. by 2030. Another contributor to the sharp increase in automobile sales is the very low price of gasoline in China. Chinese gasoline prices now rank among the lowest in the world for oil-importing countries, and are a third of retail prices in Europe and Japan, where steep taxes are imposed to discourage gasoline use.
Here are a couple of quick bits of data:
2001 data for oil consumption
(note China is #3 in consumption)
2007 data for oil consumption
(note China has moved to #2, ahead of Japan)
2001
19,650,000 bbl/day --US
4,570,000 bbl/day --China
2007
20,680,000 bbl/day --US
7,578,000 bbl/day --China
US consumption grow a total of 5%
China's oil consumption grew by 65% in the same time period.
The guy who wrote the article, is an idiot, IMO. It is worth noting that the Chinese economy has continued to grow unabated while the US' has not.
The best data/studies we have are detailed in an Economist article:
http://www.economist.com/businessfin...y_id=14400326#
We are facing declining or flat supplies and increasing overall demand. Any analysis, such as the one on the OP, that fails to look globally might as well be the proverbial blind man describing an elephant by feeling its foot.But analysts at Barclays Capital note that long swaps accounted for just 6.4% of total futures and options contracts, not enough to drive prices up on their own. Physical traders held more of the outstanding long positions (10.3%) and held even more short positions. This one set of numbers, in other words, does little to prove that speculators are overriding market fundamentals to drive prices. New quarterly data also released by the CFTC show that money flows to exchange-traded funds (ETFs) in commodities failed to correlate strongly with last year’s price surge.
It seems the data is still being pored over, but I remain dubious about linking the entire run up to simple speculation.
Also, by the by, the US' economy as a proportion of the overall global economy has been steadily shrinking for decades.
Important yes, but not the sole driver.
Sure. I appreciate your perspective and the links, RG. Journalists often over e the stew. That seems to be the case here.It seems the data is still being pored over, but I remain dubious about linking the entire run up to simple speculation.
OTOH, I was never quite convinced that gas went from $2 to $4 and back again in one calendar year -- based solely on the fundamentals.
I have no doubt that some degree of speculation was involved in the run-up somewhere. But without some fair data to give a clue as to how much of that run up was speculative, I would not want to hazard a guess, much less let anyone's guess drive public policy.
this is the point where I wish our resident petroleum economics expert, scott was still posting. Wonder what happened to him...
Demand didn't e in 2008, and supply didn't crater. In the middle of the e, the Saudis said they had oil to sell that wasn't being purchased. Tight supply? no
Both supply and demand were quite stable compared to the price e.
What's left?
"speculators are driving up the oil price now for no valid reason"
The speculators' reason is always valid for them, to make money.
People ing "we can't know without the data" are naive. The data will never be known, it's capitlism in secret, no transparency, just like derivatives.
RG's caveat about about looking at a single market for a globally traded commodity still holds, but this theme shows no sign of going away soon.http://www.mcclatchydc.com/2012/02/2...k=omni_popularA McClatchy review of the latest Commitment of Traders report from the Commodity Futures Trading Commission, which regulates oil trading, shows that producers and merchants made up just 36 percent of all contracts traded in the week ending Feb. 14.
That same week, open interest, or the total outstanding oil contracts for next-month delivery of 1,000 barrels of oil (about 42,000 gallons), stood near an all-time high above 1.486 million. Speculators who'll never take delivery of oil made up 64 percent of the market.
Not surprisingly, big Wall Street traders on Tuesday projected oil will rise above $112 a barrel; some such as Swiss giant Vitol even suggested $150-a-barrel oil is coming soon. When they dominate the market, as they do, speculators' bids can make their prophecies self-fulfilling.
"These people are not there to be heroes. They are there to make money. It's our fault because we are allowing them to do that," said Gheit. "Obviously these people are very strong, and the financial lobby is the strongest of any single lobby. I've been in this business 30 years, and I can tell you I think this is smoke and mirrors."
What's indisputable is that oil and gasoline are not in short supply, and that demand remains weak. That was crystal clear in the latest weekly energy market update by the U.S. Energy Information Administration_ published last week for the week ending Feb. 10.
"Total products supplied over the last four-week period have averaged 18.3 million barrels per day, down by 4.6 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 8.1 million barrels per day, down by 6.4 percent from the same period last year," said the EIA, the statistical arm of the Energy Department.
Inventories of stored oil are also unusually high, the EIA said.
"At 339.1 million barrels, U.S. crude oil inventories are in the upper limit of the average range for this time of year," the agency said. "Total motor gasoline inventories increased by 0.4 million barrels last week and are in the upper limit of the average range."
Hence, no shortage to explain soaring prices.
In fact, U.S. demand and consumption patterns are so abnormal compared to recent decades that oil and gasoline are both now being exported to Europe, Asia and Latin America.
I figure the oil and financial sectors want Barry gone, and Willard Gecko in.
free market? GMAFB The entire economic system is gamed by the UCA.
a slightly weird take in Forbes:
http://www.forbes.com/sites/louiswoo...ar-is-falling/In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.
During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl. It has been higher than that during 225 of those months and lower than that during 268 of those months. Plotted as a graph, the line representing the price of a barrel of oil in terms of gold has crossed the horizontal line representing the long-term average price (Au0.0732/bbl) 29 times.
At Au0.0602/bbl, today’s WTI price is only 82% of its average over the past 41+ years. Assuming that gold prices remained at today’s $1,759.30/oz, WTI prices would have to rise by about 22%, to $128.86/bbl, in order to reach their long-term average in terms of gold.
As mentioned earlier, such an increase would drive up retail gasoline prices by somewhere between $0.65 and $0.75 per gallon.
At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices.
Americans whine non-stop about the tiniest discomfort or inconvenience.
Consider countries that must go buy $ (fees!) so they can go buy oil.
An oil exec said before Congress that speculative traders push up the price of a barrel by about 30%.
oil and foodstuffs must be barred from being speculated against.
Last edited by boutons_deux; 02-23-2012 at 02:15 PM.
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