Calafia Beach Pundit: Crude oil update

Tuesday, October 13, 2009

Crude oil update

Crude oil has been trading around $70/bbl for the past four months and shows no signs of weakness. Relative to gold, oil is trading a little on the expensive side, but cheaper than it was for most of the 2000s. I continue to think that the commodity story (i.e., with almost all commodities trading higher this year and still firm) is due to a combination of a) rebounding global economic activity, and b) accommodative monetary policy from almost all central banks. This is not only a recovery but a reflation of sorts. It could turn ugly if prices move substantially higher and central banks are slow to reverse course, but for now it can only mean that economies enjoy a positive feedback loop of rising confidence, expanding activity, and stronger cash flows. Stay bullish.

10 comments:

AusGarry said...: Hi Scott - thanks for your site. Trying to stay bullish BUT can't get out of my mind waht the pessimists are saying re the delveraging of the American consumer and how this will come back to bite after the stimulus wears off (and is compounded by the necessary tightening). Can see how this can be compensated over the medium term by re-balancing (and higher US exports) but in the medium term, a few years, this has got to dampen. Tell me they're wrong.; October 13, 2009 at 4:14 PM
Gene Prescott said...: Scott, et als

Does anyone know by reference identifier what portion of the Baucus bill contains the scenario addressed in your Obamacare post?; October 13, 2009 at 7:43 PM
Vespasianus said...: Hola Scott, great posts as usual. I found interesting the fact you mentioned last post in your reply about the dollar trading low, and however, not in danger of losing its current status as international reserve currency, as we saw recently with the financial panic and the flight to quality ¿What's your explanation about that? In other respect, at what interest rate level would you consider the FED is "tightening"? Maybe real short interest over zero?; October 14, 2009 at 3:48 AM
Unknown said...: This comment has been removed by the author.; October 14, 2009 at 7:21 AM
Public Library said...: If crude continues higher, consider it a precursor of the next recession. High oil prices have coincided quite nicely with recession.

Easy money can surely push crude further along much like it did prior to the 2008 debacle.

Easy money has plenty of negative effects. Most investors miss the signs while drinking from the punch bowl.

This has been one massive hair of the dog so to speak but every hangover ends the same way...; October 14, 2009 at 9:24 AM
Scott Grannis said...: If crude approaches $100 then I will start to worry that it might slow down the economy. Until then I don't see a problem. In real terms, crude today is cheaper than it was in the 1980-82 period.; October 14, 2009 at 11:50 AM
Scott Grannis said...: Antonio: I don't think the dollar has fallen enough to trigger a panic. It would take a real panic and much lower prices for the dollar to lose its reserve currency status. There are just so many dollars all over the world that it's almost impossible for everyone to dump their dollar holdings. The big holders like China would do their balance sheet a huge disservice if they sold the dollar massively. They are stuck between a rock and a hard place.

I hope that the Fed can soon figure out that it's ok to tighten and that a tightening would actually be a very good thing.; October 14, 2009 at 4:52 PM
Douglas said...: Hi Scott, trying to catch up on my reading...
From my point of view, if the world economy(ies) start to grow significantly they will run into the ceiling of global oil production capacity. During the past run up of price producers were drilling and pumping flat out and they were unable to expand production to meet expanding demand which was part of the reason for escalating prices. We will find the same ceiling there now, it hasn't gone away, and in fact there is a global decline of between 6% and 7% per year, according to the IEA, so it looks like we're all between a rock and a hard place, if growth is robust we hit a limit to that growth, but if there is slight growth the reduced demand may reduce incentive to make the massive investments in expanding exploration and exploitation of the resource, further tightening supply.; October 15, 2009 at 6:13 PM
Scott Grannis said...: Hi Doug: you need to have faith in the market's ability to work things out. As you say, if growth becomes a barn-burner, oil prices might rise to the point that they choke off growth. Then growth will slow, and demand will come back into balance with supply. But meanwhile, the higher prices will encourage more supply....

In any event, only the market can figure out how all these forces are going to balance. Politicians, no matter how smart, don't have a chance.; October 15, 2009 at 7:29 PM
Scott Grannis said...: AusGarry: you need to realize that deleveraging is not necessarily a bad thing. Growth is not created by leveraging up, so it can't be destroyed by deleveraging. Borrowing is just a way of redistributing the money that is being earned; it doesn't create new demand, it just puts savers and spenders in more efficient contact with each other. Borrowing and leverage can facilitate growth, but they don't create growth.

Trade flows come and go, but they don't determine growth. If the US saves more relative to the rest of the world, then US imports will slow and US exports will rise. Foreigners will buy more of our goods and services than they will our financial assets.

For every dollar saved, there must be someone who spends that dollar on something.

Re-balancing is something that exists only in the minds of those who think they can understand and predict the consequences of billions of people interacting in the global marketplace. It is hubris to the max.; October 15, 2009 at 7:42 PM