Oil to $50 ... or $150?
by Sean Brodrick
When people ask me if I think crude oil is going to $50 or $150, I nod sagely and say: "Yes, Hmmmm …. probably."
I'm not being flip. I'm simply giving both the short-term and the long-term time frames.Short-term, crude oil is probably heading lower, even though it's nearly 60% off its highs.
The last chance to hold the line on oil prices was at OPEC's emergency meeting. And the oil cartel choked like a cat on a hairball. They cut 1.5 million barrels per day of production when they needed to cut about 3 million barrels per day.
The OPEC meeting was the last obstacle in the way of deflationary forces that are driving oil prices lower in the short-term. Long-term, there are forces that should drive oil much higher. And one of the paradoxical things about the oil market is the longer that prices stay lower, the harder, faster and more furious the rebound will probably be.
The good news is you can make money on both sides of the market. We'll get to the long-term forces in a minute, as well as potential trading opportunities. First, let's look at the short-term forces.
Short-term Force #1:
Economic Weakness
The prices of commodities and stocks are down across the board as investors resign themselves to some form of global recession. Economies from Boston to Beijing are grinding into low gear. And demand for crude oil and gasoline is falling off a cliff.
Here in the U.S., Americans are using around 18.6 million barrels of oil a day, a drop of 1.8 million barrels year over year. Demand for gasoline is decelerating rapidly.
Take a look at this chart from Calculated Risk and you'll see what I mean.Americans drove 15 billion fewer miles this past August compared with the same month a year ago — a drop of 5.2% and the biggest single monthly decline since 1942, the first year data was collected.
Short-term Force #2:
Hedge-Fund Selling
Hedge funds were responsible for much more of oil's climb to $150 than I or a lot of other analysts thought possible. Now, hedge funds are being hit by heavy redemptions as investors cash out and run for cover. One report concludes that investors pulled $210 billion out of U.S. hedge funds during the third quarter, forcing the funds to dump assets, including oil, thereby driving down prices.The good news is that hedge funds can't sell forever. And in fact, the worst of it should be over by the end of this year as investors square their books and take their lumps.
Short-term Force #3:
The Rising U.S. Dollar
As investors flee for safety, they sell risky assets and go into U.S. dollars. This has pumped up the dollar's value. And since oil is priced in dollars, a higher greenback tends to push crude oil prices lower. With the economy on the skids, why is the U.S. dollar looking like a safe haven?
The reason is that Europe has been hit by the credit crisis even harder than the U.S. And Eurozone countries are responding to the crisis separately — not working as a group.
This undermines confidence in the euro, and makes the U.S. dollar shine by comparison. Also, many foreign banks need dollar financing. That's all the worse for them, because they can't get loans from U.S. banks as the credit crunch worsens.
Looking at this chart, you can see that crude oil and the U.S. dollar are mirror images of each other now.But the U.S. dollar is due for a pullback in its rocket ride. That said, crude could easily go to $50 a barrel before its correction is over — becoming as deeply oversold on the downside as it was overbought on the upside.
Now, Let's Look At Some Long-Term Forces That Could Push Oil Much Higher.
Long-term Force #1:
Mexican Production Is Falling Off a Cliff
Yes, this has been going on for a long time. But it's getting worse, despite the Mexican government's frantic efforts to reverse the trend.For the month of September, Petroleos Mexicanos (Pemex), the state-owned oil company, said monthly crude output fell to the lowest since November 1995.
Production fell to 2.7 million barrels a day in September, a decline of 14% from a year ago. What matters to us, though, are exports — Mexico is the #3 supplier of imported oil to the U.S. And since Mexico uses more and more of its own oil, exports to the U.S. fell to 845,000 barrels a day, the lowest since October 1995.And it's not just Mexico — production is also falling in Russia, Kazakhstan and other oil exporters.
Long-term Force #2:
Production in the U.S. Gulf of Mexico
Is Trending Lower
Hurricane season is nearly over, but we're still feeling the impacts of Hurricanes Gustav and Ike. The Minerals Management Service recently said approximately 38.6% of the production in the Gulf was still shut-in, for a total of 32 million barrels of crude oil and 165 billion cubic feet of natural gas production in the month of September.
We can expect more drops in Gulf of Mexico production in the future in the wake of future hurricanes, because hurricanes are becoming both more frequent and more powerful.
Since 1995, there have been 207 named storms in the Atlantic basin, which includes the Gulf of Mexico — a 68% increase from the previous 13 years, according to statistics from the National Oceanic and Atmospheric administration. Of those storms, 111 were hurricanes, a 75% increase over the previous period.
2 Ways to Play This Wild Market...
If you want to play the potential downdraft in crude oil — a move that could take it to $55 or even $50 a barrel, here's how to do it... The PowerShares DB Crude Oil Double Short ETN, symbol DTO, is an exchange-traded note (ETN) that gives investors twice the inverse performance of the DB benchmark crude oil index, plus the monthly T-Bill index return.
However, the DTO is not heavily traded, so there is a gap between bid and ask that is larger than I'd like. So you might consider the UltraShort Oil & Gas ProShares ETF, symbol DUG. It is very liquid and targets twice the inverse of a big basket of energy sector stocks.And when oil bottoms and starts to head higher ...
You could consider the PowerShares DB Crude Oil Double Long, symbol DXO. This exchange-traded note backed by Deutsche bank gives investors exposure to twice the monthly performance of the DB optimum yield crude oil index, plus the monthly T-Bill index return.DXO is more liquid than the DTO — the DXO recently traded about a million shares a day.
But for real liquidity, consider the Ultra Oil & Gas ProShares (DIG). It recently traded 20 million shares per day. And it's a mirror image to DUG — DIG targets twice the performance of a basket of energy stocks including Apache Corp., Chevron, Devon Energy and more.These are incredibly volatile times in the commodity markets, and crude oil is no exception. But this painful pullback will lead to some amazing opportunities, and clear the way for the next leg up
Hitman
Wednesday, October 29, 2008
Tuesday, October 28, 2008
Europe on the brink of currency crisis meltdown
Europe on the brink of currency crisis meltdown
The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.
By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008
Comments 73 | Comment on this article
The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump. Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn. Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.
Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire. Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.
It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon. Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.
Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union. The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself. “The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.
A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states. The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?
The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.
By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008
Comments 73 | Comment on this article
The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump. Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn. Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.
Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire. Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.
It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon. Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.
Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union. The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself. “The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.
A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states. The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?
Sunday, October 26, 2008
The Genesis Of Banking part 1
The genesis of banking started in England during the era of the early Blacksmith days (good ol’ Smithy!) that made strong boxes for customers who wanted to store his or her valuables. Whenever a person who had excess Gold for safekeeping, he would take it to Smithy, who always had an extra “safe” or strong box in the back of his place. The Blacksmith would issue a warehouse receipt so that he could collect his gold on demand after paying a “warehouse fees”.
As usual with human nature, the Blacksmith became greedy; they assumed that since everybody didn’t go to collect their gold all at the same time, he could lend some out on a rental basis. And this was the birth of illiquid banking which we now term as “Fractional Reserve Banking”.
Eventually the governments got on to this scheme as well and when there was not enough Gold or Silver in their coffers to punch out hard money or you can say par value money.They recognized the profit and the power to create money out of thin air, just by simply printing “warehouse receipts”. When the Government took over this scheme the receipt was renamed “currency” and the created banks called their receipts “Cheques”.
Currencies were guaranteed by the reserves of gold or silver in the bank, while the bank Cheques were guaranteed by the capital of the banks. The governments had rarely had that much of gold or silver in their reserves, plus borrowings could equal all the requests for gold redemptions at any one time. Since the people had trust in Governments to redeem on demand there was no demand. (All depositors assumed that the gold was available!)
Banks made incredible profits as long as there no mismanagement and they had the ability to create money of thin air and lending at interest to eight or ten borrowers at the same time. The method greatly expanded the system of expansion of money supply and it became the most profitable business.
The Banking function operates the opposite to all other types of business as the cash deposited into the bank is a liability to the bank as it is owed to the depositor. Money is then lent out to the borrowers which will capture in the books of the banks as a profit/asset.
To put it in weird circumstances if you deposit one Ringgit it has become a liability to the bank as it has to lend out to eight people simultaneously and creates eight ringgit out of thin air. So as you can see the banks are indeed risky because they accept deposits which they guarantee to repay on demand, and lend out for a 20 years mortgage.
If a major problem arises and a majority of depositors tried to withdraw all at the same time, most banks would just go belly up. It is so strange that most people would trust banks as they are the most illiquid institutions on earth.
As usual with human nature, the Blacksmith became greedy; they assumed that since everybody didn’t go to collect their gold all at the same time, he could lend some out on a rental basis. And this was the birth of illiquid banking which we now term as “Fractional Reserve Banking”.
Eventually the governments got on to this scheme as well and when there was not enough Gold or Silver in their coffers to punch out hard money or you can say par value money.They recognized the profit and the power to create money out of thin air, just by simply printing “warehouse receipts”. When the Government took over this scheme the receipt was renamed “currency” and the created banks called their receipts “Cheques”.
Currencies were guaranteed by the reserves of gold or silver in the bank, while the bank Cheques were guaranteed by the capital of the banks. The governments had rarely had that much of gold or silver in their reserves, plus borrowings could equal all the requests for gold redemptions at any one time. Since the people had trust in Governments to redeem on demand there was no demand. (All depositors assumed that the gold was available!)
Banks made incredible profits as long as there no mismanagement and they had the ability to create money of thin air and lending at interest to eight or ten borrowers at the same time. The method greatly expanded the system of expansion of money supply and it became the most profitable business.
The Banking function operates the opposite to all other types of business as the cash deposited into the bank is a liability to the bank as it is owed to the depositor. Money is then lent out to the borrowers which will capture in the books of the banks as a profit/asset.
To put it in weird circumstances if you deposit one Ringgit it has become a liability to the bank as it has to lend out to eight people simultaneously and creates eight ringgit out of thin air. So as you can see the banks are indeed risky because they accept deposits which they guarantee to repay on demand, and lend out for a 20 years mortgage.
If a major problem arises and a majority of depositors tried to withdraw all at the same time, most banks would just go belly up. It is so strange that most people would trust banks as they are the most illiquid institutions on earth.
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