-- Posted Tuesday, 10 March 2009 | | Source: GoldSeek.com
The short term effect from the deflation of the commodity bubble is about to blow up in every one’s face, yet again…
Let’s start with the basics. Do we all understand the difference between the real value of tangible assets versus notional value of paper assets? Tangible assets have a limited quantity (think: Supply) and utility (think: Demand). Paper assets, on the other hand, have an un-limited quantity (because there is no limitation to how much you can create) and marginal utility (because demand for them goes negative once they begin to default). Typically tangible assets cannot be created out of thin air, unlike their paper counter parts.
For the purpose of discussion we will take a wide angled view of the Energy Markets; one sector that could easily be described as having a “Limited Quantity”. I think the biggest concern for this market is going to be Supply in the coming months.
The Energy Market is an interesting case study. In a very short period of time the price of Crude Oil literally doubled from the $65-$75 level to about the $150 level; and then straight down to below the $40 level in less than six months. While the consumer is happy that he is no longer paying $4.50+ for a gallon of gas, poor despotic dictators like Hugo Chavez (I really don’t care if you think he “wins” his elections) are going broke at these price levels.
All hail Ben Bernanke for deflating the Commodity Bubble. Isn’t it funny how commodities are in a bubble whenever they are increasing in value yet real estate wasn’t a bubble until it blew up?
But it is not just our good friend in Venezuela that is suffering. At these price levels the Oil Sands in Canada are too expensive to extract and refine. Financing for drilling and exploration for new sources has scaled back, partly because of price but mostly because of the collapse in the Credit Market. Existing wells that are too expensive to operate are being capped. This is all pointing to a very dramatic decrease on the Supply Side that we are about to experience.
Demand is another story and the US is unique in one particular aspect of the demand function. Americans love driving (consuming gasoline) to Wal-Mart to purchase cheap consumables which came from China. These products are loaded onto a container, shipped across the globe, loaded onto a train, and then a truck to get to their Wal-Mart; consuming a lot of diesel in the process. The US usually operates at a constant demand cycle with marginal increases and decreases from there. Think of it this way: Hybrid, Solar, and Clean Coal will never make a noticeable dent in our consumption.
I am not so much worried about the weakening demand we are currently facing, I am more concerned about supply shortages hitting the market place when marginal demand eventually picks up. My short term target for Crude Oil is $53 by the end of the month.
By the way, we are watching the same scenario play out in the agricultural markets as well. $3.60 per bushel for corn? I thought Ethanol was going to save us all!
Call me directly at 312-379-8093 to discuss.
Mark Pasek
Global LaSalle
PH: 312-379-8093
mpasek@globallasalle.com
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-- Posted Tuesday, 10 March 2009 | Digg This Article
| Source: GoldSeek.com
