-- Posted Monday, 9 June 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
6-9-08
While many commodities appear to have formed tops here in the first half of 2008, crude oil and the rest of the energy group have astonished the world: crude oil – a $16 move in 2 days; unleaded gas – a 34¢ move in 2 days; heating oil – a 41¢ move in 2 days.
And the action of early June merely caps off one of the great commodity moves of all time. From its low in 1998, crude oil has gone from $10.35 to $139.12 (high Friday), a multiple of almost 13½ times. Set against this, gold’s 4-fold move, while quite respectable in general terms, seems a little small.
Yet this astounding technical move seems at complete variance with fundamentals. For example, there is in Alberta, Canada a substance called bitumen (tar sands) which can be refined into crude oil at a small additional cost. Prices long ago passed the level at which it is profitable to mine the bitumen, and it is part of Canada’s energy mix today.
The interesting point about bitumen is that the reserves of bitumen in Alberta are equal to double the world reserves of crude oil. Further, there is another reserve of bitumen, in Venezuela, and while Venezuela is currently unfriendly to the U.S., long before the Canadian reserve is used up, Venezuela will have been through a half dozen changes of government. (If history is a guide, 3 of them will be friendly to the U.S. and 3 unfriendly. And this will provide plenty of opportunity for us to buy Venezuelan bitumen.)
How much bitumen is there in Venezuela? An amount approximately equal to that of Alberta, Canada. In short, here is a substance easily refinable into crude oil, and the Western Hemisphere has 4 times as much of it as all the crude reserves in the world. All of a sudden the energy crisis does not seem quite so bad.
And on top of all this bitumen, there is another substance refinable into crude oil (at only a small additional cost above bitumen). This is the deposit known as shale oil, or kerogen. And the very interesting thing about kerogen is that there is a deposit of it in the states surrounding Colorado (plus a few others) equal to 4 times the total world crude oil reserves, and this is right here in the good old U.S.A.
To summarize, there are available vast quantities of two substances easily refinable into crude oil at a small additional cost, and most of it is right here in North America. Peak oil, where is thy sting.
And if you are in the mood for some more good news, on April 10, 2008 the U.S. Geological Survey announced that in the Bakken Basin in Montana (extending into South Dakota and Saskatchewan) there was a massive deposit of crude oil. (Yes, that’s crude oil, not some substance that can be turned into crude but the real stuff.) This crude is intermixed with the shale oil. It is difficult to reach because there is a layer of crude followed by a layer of shale, etc. It has been known for some time, but the technological innovation which allows it to be drilled is horizontal drilling. The U.S. Geological Survey estimates that Bakken contains 3 to 4.3 billion barrels.
But the U.S.G.S report. might be a case of bureaucrats being a little conservative. The Energy Information Administration, which is a branch of the U.S. Dept. of Energy, estimates that Bakken may contain, not 4.3 billion, but 503 billion barrels of crude oil. That would be enough to run the U.S. economy for 41 years. And yet in the face of all this good (bearish) news crude oil keeps powering to new highs.
It must also be kept in mind that commodities, quite unlike a stock index, tend to base in long, slow movements and peak in sharp spikes. For example, around the turn of the millennium gold made a 6 year saucer bottom trading very close to $300. When it broke out in early 2002, that was a strong buy signal.
However, at the present time we have had spike tops in 14 different commodities: frozen pork bellies in early February, coffee in late February, cotton, platinum, world sugar, soybean oil and meal and palladium in early March, silver in early and mid-March, gold and wheat in mid-March, rice and soybeans and rough rice in late April. This is a picture of a commodity top, not a bottom.
Further, it is important to keep in mind the principle that, when a big move occurs on news, it is discounting the news and is not likely to go further. But when the move occurs without news, then either the news is not yet out or there is a fundamental supply-demand imbalance which is yet unredressed. Four news items appeared to account for the crude move of June 5-6:
- a sharp drop in the U.S. dollar;
- a threat of war with Iran;
- a 400 point drop in the DJI;
- and a 0.5% jump in the unemployment rate.
It was the last item which was given the most weight by the markets. However, there is a characteristic mistake which the economic world makes about government economic data. It is always preliminary. The initial release of each piece of data is merely a best guess and is often revised. For example, when partisans of a Fed easing were trying to find propaganda for their position last summer, they were given a big boost by the preliminary employment figure for August. It showed a net loss of 4,000 jobs. The markets were shaken. However, that number never happened. We now know that there was a gain of 74,000 jobs last August. This is a very frequent event. The market discounts news that never occurred. The jump in unemployment for May is likely similar. It was so big that it will very likely be revised down to a more normal number.
If you were bullish crude oil in January 2007, I congratulate you. If you were bullish commodities in August 2007, ditto. But commodities, unlike stocks, move on fundamental supply and demand. They have no earnings to power a steady, sustained move. The great excitement one often sees at a commodity top usually consists of (bad) speculators bidding the price up too high. When these spike tops break, the commodity can go limit down for several days. The time to enter a new commodity position is when dullness prevails, not excitement.
The above is the type of thinking that goes into the One-handed Economist. This is my fortnightly newsletter, available for $300 per year, which makes predictions on the financial markets. Being the one-handed economist, I never say, “On the one hand this but on the other hand that.” I call it the way I see it. And right or wrong you know what my prediction was. Also of interest is my web site, www.thegoldbug.net, which applies economic truths to political and social problems of the day. This week’s blog is “The Love of Money.” No charge. (For directions to subscribe to OHE (and an amusing economic poem) visit www.thegoldbug.net.)
In the June 13 issue, I will be discussing the move of June 5-6. What is going on in crude, and what are the effects on gold and the dollar? And what is the One-handed Economist advising now?
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-- Posted Monday, 9 June 2008 | Digg This Article | Source: GoldSeek.com
