Addison Wiggin – March 29, 2012
- Is “the world’s swing producer” losing control? Why oil stays persistently above the House of Saud’s $100 target
- Why oil is set to stay high even if the White House breaks into the Strategic Petroleum Reserve (again)… and the unique profit opportunity that results
- BRICS nations say rude things about central banks… while Abe Cofnas says very nice things about China’s prospects
- Old news: Parents take on debt for their students’ education. New news: for kindergarten
- Jeff Bezos travels down a familiar road… Like-minded readers tee off on the biggest “gated community of all”… your last chance to play our mock trades for real… and more!
The price of oil touched above $105 a barrel this morning. At least, the gooey stuff that sloshes around the big terminal in Cushing, Okla., did. Most of the rest of the world — including the East and Gulf coasts of the U.S. — is paying close to $125.
“There is no rational reason why oil prices are continuing to remain at these high levels,” writes an indignant Saudi Arabian oil minister Ali al-Naimi, kicking off a speculative episode of The 5 Min. Forecast.
What will happen to gas prices when the world stops believing the Saudis can control the oil price?
The answer reveals a powerful way to profit from a pernicious and potentially unavoidable trend.
“The bottom line is,” al-Naimmi wrote in a rare Financial Times opinion piece this morming, “that Saudi Arabia would like to see a lower price.”
In mid-January, he announced their preferred price would be $100.
Our forecast this morning: They won’t get it… for a variety of reasons.
Iran’s oil customers are already making plans for European Union sanctions that kick in at the end of June. Iranian exports are likely to drop 14% this month alone, according to the Swiss oil-shipping specialist Petro-Logistics SA.
“Shipments are likely to shrink further,” says today’s Wall Street Journal, “if President Barack Obama determines by Friday, as expected, that markets can adjust to fewer barrels of Iranian oil.”
Of course, they can adjust… with higher prices.
The International Energy Agency says last year, global oil demand ran about 89 million barrels per day. Supply was only 88.4 million. You can see the problem already.
The IEA projects this year demand will grow to 89.8 million barrels per day.
“Where is the excess supply going to come from?” energy fund manager Joe Dancy asks rhetorically. Dancy is, of course, referring to the legendary “spare capacity” weilded by the House of Saud… their ability to jump-start new oil production within 30 days and keep it up for at least 90 days.
“Last year,” says Dancy, “we saw 3-5 million barrels per day excess capacity, and I see numbers of 1.5-2 million barrels per day now. So if we lose another 1 million per day [from Iran] as of July 1, we’re going to have essentially zero spare capacity.”
The Saudis promise they can ride to the rescue — upping their production to as high as 12.5 million barrels per day within a few months.
That compares with a figure of 10 million last month. Or… “the most they’ve ever produced in 30 years,” says Dancy. “I don’t know how they’re going to crank another 1-2 million.”
The U.S. president could always release something from the Strategic Petroleum Reserve and crush prices that way, right? An option he’s surely itching to exercise as we round the bend toward the general election.
Unfortunately, last year when the White House tapped into the SPR, the price jumped nearly 10% over the following month.
What went wrong? The SPR’s designed to release up to 5 million barrels per day. But only about 750,000 could actually come out.
That’s because the pipelines coming out of the SPR were built decades ago to serve the middle of the country, including the Cushing terminal. But nowadays that region is already awash in oil from the Bakken trend in North Dakota. It couldn’t take any more from the SPR.
Only a downgrade of U.S. debt and a euro-scare brought oil prices down. But not for long.
After 15 years of growing production, China, the world’s No. 4 producer, is seeing a leveling off at around 4 million barrels a day.
There are rumors of a short-term disruption, with a leak taking a large offshore field offline. But over the long-term trend: China’s oil fields — including Daqing, one of the world’s largest — are getting old and tired.
“The fall,” says the Financial Times, “explains in part why China is importing record amounts of crude oil: Beijing needs to fill a bigger gap between surging oil demand and falling domestic oil output.”
Ditto for the rest of the world.
This morning, the average gasoline price here in Baltimore topped $4 a gallon. That makes us the 11th state to reach that rarefied air this year. With more on the way, no doubt.
Even with a record-warm March across much of the country, including here in Maryland, we haven’t come close to peak driving season yet. The trend is in place for record levels of gas prices this summer.
While rising gas prices could put a stranglehold on “the recovery” we’ve been hearing so much about… it also makes a strategy uncovered by our income specialist Jim Nelson more timely and compelling than ever.
Jim calls them “gasoline paybacks.”
“Many American investors,” Jim says, “are realizing that these gas-backed ‘plans’ are not just a smart way to cover the rising cost of gasoline… but a new way to pay for retirement.”
“In fact, some of these ‘plans’ are so generous, you can use them to collect as much as three times the money that your typical blue chip income stock might pay.” They have nothing to do with stocks. Jim explains how they work — and how you can start collecting — right here.
The S&P is back below 1,400 this morning. Dow 13,000 is in jeopardy.
In general U.S. stocks are adding to yesterday’s losses, which began around midday and left the financial media comically scrambling for explanations.
First, the losses were attributed to weak durable-goods numbers — which came out before the open. Then it was a drop in oil prices. Then it was the market getting dragged down by industrials like Caterpillar and Alcoa.
You’d think the financial media could get on Skype or something before bantering such silliness about.
Anyway, among the items traders are chewing on today…
- The Commerce Department’s final answer on fourth-quarter GDP rang in at an annualized 3.0%, the same as last month’s guess and in line with expectations
- First-time unemployment claims fell to 359,000 last week… but the previous week’s figure was revised upward big-time
- Retail bellwether Best Buy turned in an earnings “beat”… but it’s shuttering 50 U.S. stores.
Leaders from the BRICS nations continued a theme from yesterday’s 5: They want the world to know they’re fed up with Western central banks.
“Excessive liquidity from the aggressive policy actions taken by central banks to stabilize their domestic economies have been spilling over into emerging-market economies, fostering excessive volatility in capital flows and commodity prices,” according to a joint declaration issued at a summit in New Delhi.
Intemperate words for such a lofty gathering.
“Quantitative easing policies,” Brazilian President Dilma Rousseff, channeling Jim Rogers, “that have triggered what can only be described as a monetary tsunami have led to a currency war and have introduced new and perverse forms of protectionism in the world.”
So what does this august body plan to do about it? They’ve set up a committee to look into setting up their own version of the World Bank.
Additional meetings are planned for later this year.
“A hard landing is highly unlikely in China,” concludes our market-sentiment maven Abe Cofnas after a week in Beijing promoting the Chinese release of his book Sentiment Indicators.
“I’ve met with traders, fund managers and brokerage firms. And it’s hard to miss the sense of optimism and passion they have about the future.”
“Simply put, while the fear of a Chinese slowdown is paralyzing the world markets, the Chinese investors I’ve met believe that the coming years are full of opportunity. These are years for acquiring wealth.”
Hmmmn… a sense of optimism… at the height of a bubble? Never.
“Stability is the main goal of Chinese management of the political economy,” Abe says. “This is command control economy, which allows intervention measures on energy prices, lending rates, etc.”
“Chinese authorities will do everything possible to navigate the economy to avoid a hard landing and encourage confidence. I believe the time is right to be contrarian and build a position in China.”
We’ll have to see how that pans out. This is just the kind of thing Abe proves us wrong on time after time.
[Ed. Note: Checking in with Abe’s “for-demonstration-purposes-only” trade of the week… The Japanese yen clings this morning to the 82 level… making a payout of 24% highly likely by the close tomorrow.
That would make him 5 for 5 on these trades. If you’ve even thought about following Abe’s guidance for real, you have only a few hours in which to do so. Access to Fear & Greed Trader is still available for half off the regular fee… and a risk-free money back guarantee. Why not give it a shot? You might enjoy it.]
We’ve been made aware of a new bubble this morning: loans for private high-school education. And middle school. Even kindergarten.
“A growing number of parents are seeking tuition assistance as soon as kindergarten,” according to Smart Money. One out of five families — 20% — who applied for aid to pay for K-12 education have incomes of $150,000 or more. That’s according to 2011 figures from the National Association of Independent Schools. Only eight years ago, it was 6%.
Private-school tuition is up 26% compared with 2006-07, the same research says.
Rather than government subsidies driving up price, this smacks more of people desperate to cling to upper-middle-class status… and lenders stupid enough to hand them the rope.
Did Amazon founder Jeff Bezos buy himself a world of trouble?
Using sonar, his Bezos Expeditions project has located the five engines used to launch Apollo 11 for the first moon landing. They lie 14,000 feet beneath the surface of the Atlantic — where exactly, he won’t say. He intends to raise at least one of them.
Longtime readers familiar with the anguished tale of Odyssey Marine, chronicled in our forthcoming documentary Risk!, know where we’re going with this.
But it appears Bezos is doing this as a rich man’s hobby, not as an enterprise. “Though they’ve been on the ocean floor for a long time, the engines remain the property of NASA,” Bezos writes.
He hopes to get an engine displayed at the Seattle Museum of Flight. But if he can raise only one, NASA will likely give the Smithsonian dibs.
“Pity our leaders apparently don’t seem to get it,” a reader writes, kicking off a common thread in our discussion of gated communities. “The most exclusive gated communities in the U.S. are the government buildings, including the White House, Congress, the Supreme Court and every federal building.”
“Gate-guarded residential communities are pikers,” adds another, “compared with the largest gated communities in the world: the United States and every other welfare-police state.”
“No undesirable immigrants! Monitor social media online and evict any tourist that a bureaucrat finds threatening! The U.S. is the largest gated community in the world!”
“I frequently drive past gated communities here in Washington, D.C.,” chimes in a third, “about which I have not heard complaints…. ”
“It seems to me that gating by ordinary citizens for protection from crime is much less offensive than gating by government officials for protection from their subjects.”
“One might say, ‘It’s to protect against evil terrorists,’ but I have my doubts.”
The 5: Indeed, “We will reopen Pennsylvania Avenue in front of the White House.” read the 2000 Republican Party platform. Clinton closed it after the Oklahoma City bombing in 1995.
The promise apparently got buried somewhere in the rubble of the World Trade Center.
“I anxiously await your updated 2012 forecast,” a Reserve member writes of our new project in which we’ve solicited and received the advice of Bill Bonner, Marc Faber and Jim Rogers, among others.
“I just saw in the WSJ recently that the Fed is purchasing about 61% of all new Treasury debt,” adds another. Isn’t that what banana republics do? It’s keeping this insane deficit spending alive and interest rates low.
“I live in Tampa and I eagerly await your flashpoint to happen during the Republican convention. The mayor originally said to get out of town. Now he says to stay in town so Tampa doesn’t look like a ghost town to the world.”
“I think I’ll take his original advice. Never did like tear gas that much.”
“The guy who blew himself and his house up in Georgia,” a reader writes after yesterday’s episode of The 5, “is like what happened to bring on Arab Spring, but Americans apparently don’t listen or pay attention to such stories and implications.”
“Just like your story on the renting generation and geek girls. It amazes me how folks pay attention to things that have minor or no impact on real life.”
“Who cares?” writes a reader fed up with comparisons between the Tea Party and Occupy. “Two more groups of sheeple with much too narrow agendas that don’t even begin to scratch the surface of the problems.”
“I hear how this country will die: not with a bang, but a whimper. Look at the laws and executive orders enacted in the last 120 days. Not even a whimper. Sorry, 5, I disagree with your scenarios of riots in the streets. A few ripples here and there, with only the trivial making it into the popular media, but that’s all. Not even a whimper.”
“Thanks, 5, for being there. Keep it up for as long as you can. See you in Guantanamo.”
The 5: Hmnnn… you mean people are too distracted by bread and circuses — geek girls and Dancing With the Stars — to get angry?
We’d pen a thoughtful reply, but we have to get back to our Hunger Games companion reading…
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. “Please share your ‘lifetime list of must-reads.’ I didn’t see it at LFB.”
The 5: Heh… right now the list is only in our head… and a work in progress. We’ll give it some more thought… and get it online ASAP. We’re getting ready to make a significant announcement regarding our work at LFB. Mark your calendar… Tax Day.
P.P.S. Last chance: Half-price access to Abe Cofnas’ Fear & Greed Trader expires at midnight tonight. Looks like he may go 5 for 5 this week on our “mock” trades. Hate to see you miss out.
“The easy oil is all but gone,” says Daily Resource Hunter editor Matt Insley, reminding us of another truism behind $4 gasoline.
That’s why companies are hard at work in some of the world’s harshest climes just to find more barrels of the stuff.
“The first thing to emphasize” Byron King points out, “is how expensive and risky it is to work offshore. Just a broken anchor chain can cause $180 million of damages — and that’s without any major environmental issues.”
The only bright point we see from our perch is the gradual uptick in onshore oil production in the U.S. As Byron pointed out in his latest write-up, America’s onshore oil and gas boom is starting to move the needle in the right direction.
If you’ve ever wondered how this renaissance of energy started, you’ll want to check out this latest info video from Matt and the crew at Daily Resource Hunter. It takes less than four minutes of your time…
