Understanding The Oil Markets — 2010 Version

Understanding The Oil Markets — 2010 Version – I’m starting to think that the oil markets in 2010 are just a more chaotic version of the markets as they were in 2007. You will recall that the price was rising, demand was outstripping supply, OPEC said the markets were well-supplied, and would not raise output quotas and the Venezuelans were saying $100/barrel was a fair price for oil. Most of this has happened just in the past week. Consider these two statements made in a recent Bloomberg report

  • Global oil demand has exceeded supply by more than 900,000 barrels a day on a seasonally adjusted basis since May, Goldman Sachs Group Inc. said in an e-mailed report today. Goldman expects the world oil market to remain in deficit in the first half of next year, it said.
  • OPEC maintained its output quotas, forecasting demand growth will slow as the global economy struggles to recover amid ample supplies. Oil supply and demand are “in balance,” and $70 to $80 is “a good price” for oil, Saudi Arabian Oil Minister Ali al-Naimi said at the group’s meeting in Quito, Ecuador, on Dec. 11.

Who are you going to believe? Well, you should never believe Goldman Sachs, given their constant efforts to drive up the oil price to support their index-trading money-making machine. But you should never believe OPEC either, given their constant efforts to drive up the oil price by withholding oil from the market. If $70 to $80 is a "good price" for oil, why did OPEC maintain their quotas just as the price touched $90/barrel on the NYMEX last week? One thing we do know is that OPEC producers are breaking their quotas left and right—

Prospects for a New Peak in Crude & Condensate – I pointed out on Friday that there provisionally appeared to be a new peak in global liquid fuel production, at least based on reports from OPEC and the IEA, and subject to confirmation by the third agency (the EIA) and the inevitable revisions to the series. Predictably, this led to a chorus of comments that the full liquid fuel series includes various things that aren’t really oil, such as biofuels, and natural gas liquids (things like butane and propane).  A more conservative definition of oil would still show a peak in the past, some suggested.  There are decent arguments on both sides of what exact definition of oil one should use.  If we look at one more conservative but reasonable definition – crude plus lease condensate (C&C) – we see the picture above (according to the EIA).  I have shown the full liquid fuel series in blue, and only the C&C component in red. Now, the EIA is only up to September as of today, whereas OPEC and the IEA have just released November numbers.  So the big leap up in October/November is not apparent in the graph above.  
 
Credit Card Companies Seeking to Expand Lending? – This weekend, I received a rather odd email from American Express, announcing that they were roughly doubling my credit limit.  This was odd, I say, because I hardly needed a higher credit limit; the card currently has a balance of $222 on it, from traveling to New York last week.  I certainly hadn’t requested such a thing.  I’ll keep the higher limit, since this modestly improves my credit score, but it gives me a sort of shifty feeling.  Why would they have increased my limit, unless they thought they might somehow induce me to go on a wild, credit-fuelled binge? Apparently, I’m not the only one getting unsolicited offers of more credit:  the New York Times has a piece on lenders once again plunging–or at least, dipping a few toes–into the bottom of the market: Lenders have taken $189 billion in credit card losses since 2007, according to Oliver Wyman Group, a financial consultancy. That was a significant part of the $2 trillion or so that banks are estimated to have lost since the crisis began, and a contributor to the government bailout of the banking system.
 
Research: ‘Skin in the Game’ Is Good for Mortgage Market – Requiring mortgage providers to retain a stake in what they have lent reduced the chance a borrower will run into trouble, a new paper from the Federal Reserve Bank of San Francisco argues. The research, released Monday, was weighing the “skin in the game” idea, which holds that mortgage-lending quality is improved when those who offer the mortgage are prevented from unloading it completely onto other investors. “Retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities” resulting from the mortgage process, wrote bank economist Christopher James, as part of the regional Fed’s regular Economic Letter series. The paper’s findings suggest that the recently passed financial-overhaul legislation will have a positive influence on the future of the housing market. Under the new law, those who securitize mortgages are required to hold a minimum of a 5% exposure to the credit risk. It is hoped the increased chance a loan originator will feel pain should the borrower run into trouble will make those lenders more careful when providing loans.
 
Senators Express Concerns Over Debit-Card Fees – A bipartisan group of U.S. senators is urging the U.S. Federal Reserve to make sure that consumers aren’t hurt by new rules that would limit debit-card transaction fees. In a recent letter to Federal Reserve Chairman Ben Bernanke, the senators said they fear that new rules on debit card “interchange” fees could replace market-based pricing with a government-controlled system. They also expressed skepticism that interchange fee limits will benefit consumers. Price-fixing hurts consumers, they said. Congress earlier this year signed off on a sweeping package of financial regulations that requires the Federal Reserve Board to issue rules on “interchange fees,” which banks charge merchants each time a debit card is swiped. The Fed Board plans to hold a meeting on the issue later this week, on Dec. 16. In a first for the Fed, the critical meeting will be webcast.
 
Economies want to adjust – THIS week’s cover Leader discusses the three-way split in global economic performance that’s defined recent months and which will likely characterise growth in 2011. In America, growth is picking up, but unemployment remains high and the prospects for deficit-reduction are uncertain. In Europe, recovery is weak, especially on the periphery, and austerity and debt crises loom. Among emerging markets, growth is scorching, and leaders are struggling to deal with inflation. The biggest emerging market question mark is China, of course. China’s economy has been among the principal engines of global growth, and its expansion roared to near 11% this year. But observers are growing increasingly fearful that the Chinese government will be unable to contain inflation without producing a too-rapid growth slowdown, which could harm rich world economies. Here‘s the New York Times: But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.
 
The Moderate Republican Stimulus – Last week I said that Obama’s position on the tax cuts was a “moderate-Republican line in the sand” and that the tax deal was closer to the Republicans’ ideal outcome than the Democrats’, but the latter argument was based on some guesses about Republican preferences. Now Mike Konczal has done some of the harder argument, uncovering hard evidence that the Republicans would have agreed to the extended child tax credit sweetener anyway and presenting five points for the argument that the Republicans wanted payroll tax cuts – in particular, they wanted them more than Making Work Pay tax credit that they replaced. Here’s Mike’s version of the administration’s chart: He calls it the “Moderate Republican Stimulus Package 2.0.”
 
Bloomberg Poll Finds That 88% Of Americans Say Bonuses At Banks Should Be Banned Or Taxed At 50% – According to the latest Bloomberg poll, a whopping 71% of respondents (many of whom are likely bankers) have said that bonuses at banks receiving bail out funds (that’s all of them) should be banned this year, and another 17% believe that a 50% tax should be imposed on all bonuses exceeding $400,000 (which, in another record bonuses year, will likely be most of them). This goes back to our thesis presented over a year ago that since Wall Street is essentially a government utility, it should be treated as one, with set IRR targets and caps, and bonuses for bankers, whose every action results in a government bail out sooner or later, should be closely controlled and scrutinized in concordance with traditional utility metrics. Then again, in keeping with the spirit of the middle-class wealth transfer program so well presented by Ben Bernanke over the past 5 years, this proposal has about a snowball’s chance in hell of passing.
 
Easter Egg Out Of The BIS: US Banks Are On The Hook To The PIIGS By Over $350 Billion  – Last night, the BIS released its latest quarterly review, as always chock full of useful information. The one major item that caught our eye was the updated exposure toward the PIIGS countries by various foreign banks. And specifically the brand new category that had never been disclosed before by the BIS, namely the "other exposures" category, which per a rather closeted footnote is defined as: "other exposures consist of the positive market value of derivative contracts, guarantees extended and credit commitments." This is exposure that appears for the first time in an official BIS document. And it is sizable: while total foreign claims stood at $2,281 billion, the newly disclosed category accounts for a whopping two thirds of a trillion: $668 billion. How generous of the BIS to share this data which as recently as 2 years ago may have been considered as material, and these days is merely dismissed with a laugh. After all who cares unless the potential loss has at least 12 zeroes in it. Yet what is most significant for the US taxpayer, who is now dead set on proving that St Sebastian was an amateur when it comes to (in)voluntary martyrdom, is that US exposure to the P(I)IGS (Italy excluded, for the time being – give it a few months), has just tripled as a result of this revelation. While before it was "common knowledge" that US banks have nothing to lose should Europe go down the drain, it has now been revealed that US banks actually have $353 billion in exposure, of which $233 billion is of this newly revealed "other category."
Charting America’s Transformation To A Part-Time Worker Society, Following 6 Straight Months Of Full Time Job Declines – It is surprising that over the past several years very little has been said in the popular media about the fact that America is slowly (but surely) transforming from a full-time to part-time employed society. And while much has been said about the temporary and now past impact of census hiring, and government jobs on the workforce, there are still few mentions in mainstream media that since the depression started in December 2007, America has lost 10.5 million full time jobs, offset by a 2.8 million increase in part time jobs. Two recent mentions of this extremely troubling phenomenon were those by David Stockman, who characterized the recent unjustified economic (and naturally market) euphoria in terms that could have come straight from David Rosenberg‘s mouth, and, more recently, Van Hoisington. And since the Teleprompter in Chief has now made it a monthly pilgirmage to extol the NFP number no matter how manipulated by Birth-Death and seasonal adjustments, perhaps next time someone can ask him why the US not only lost 478k seasonally adjusted full time workers in November but has lost full time jobs for 6 months in a row, for a total of 1.6 million job losses!
 
Bullet Proof Result Of Progressive Tax Tables? Better Economic Growth – From pessimetrics blog article entitled ‘The Effect of Changing Top Marginal Tax Rates’ written by Mike Kimel, an economics professor and co-author of the book ‘Pessimetrics:’ “The positive relationship between the top marginal tax rate and the growth in real GDP is very nearly bullet-proof. For instance, it extends all the way back to 1929, the first year for which the government computed GDP data. Additionally, higher marginal tax rates are not only correlated with faster increases in real GDP from one year to the next, but also with increases in real GDP over the subsequent two, three, or four years. This is as true going back to 1929 as it is for the period since Reagan became president. In fact, since the Reagan Revolution took hold, similar relationships have existed between the top marginal rate and several other important variables, like real median income, real private investment, consumer sentiment, the value of the dollar relative to other major currencies, and the S&P 500. Lower tax rates in any given year are associated with slower growth rates for each of these variables, whether those growth rates are measured over periods of one, two, three or four years.”
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