Thinking about Oil
Billionaire energy investor T. Boone Pickens, Jr. voiced his belief that oil prices above $100.00 are unsustainable in the short term. According to a brief CNBC interview, he is short oil, expecting a $10-$15 decline in per barrel prices in Q2 2008. Pickens cites the very fundamental reasons mentioned in previous posts - increasing supply, indeed US Crude inventories increased yet again this week, coupled with declining demand from a weakening global economy. This scenario is deflationary, but only if one discounts the effect of a declining US dollar.
The Short Squeeze In Oil
Apparently hedge funds and other savvy institutional investors, betting on an economic decline in the United States did indeed take large short positions in oil. The following information, which was produced by the International Energy Agency, lends support to the positions these savvy investors took.
“January world oil supply rose 745 kb/d to 87.2 mb/d on new output from Brazil, and recovering non-OPEC output elsewhere. However, a reassessment of 2008 prospects lowers OPEC gas liquids growth by 250 kb/d to 365 kb/d. Rising FSU, Asia-Pacific, Brazil and biofuels supplies generate 2008 non-OPEC growth of 0.97 mb/d.”
“Global oil product demand has been revised down by roughly 200 kb/d to 87.6 mb/d in 2008, following weaker GDP growth figures in an interim report by the IMF. Weaker OECD growth, however, stands against still-robust projections for GDP growth in China and the Middle East, the key oil demand growth centres. [1]”
Oil Closes at $100.74, Gold at New Highs, Stagflation
The Federal Open Markets Committee (FOMC) meeting minutes shared today voiced both recessionary and inflationary concerns.
The committee’s first concern was over consumer spending, which, after growing between 2.8% and 3.6% a year for the past five years will slow to 1.7% for FY 2008 and FY 2009 [1]. Since discretionary spending comprises approximately 70% of GDP, this slowdown shows signs of a weakening economy, one that may very nearly be racing towards recession. The contraction in spending is no where more apparent than in the earning numbers posted by both high end and low end retailers. Blue Nile, after reporting earnings which disappointed Wall Street expectations saw its share price tumble by more than 20%. Best Buy, arguably the most efficient seller of consumer electronics also disappointed the street and citing tough macroeconomic conditions cut its FY 2008 earnings estimates by 2-4% [2]. Consumer spending is slowing. Coupled with projected declines in housing prices between now and 2010, rising unemployment, and low consumer confidence levels, the trend is unlikely to turn, and in this author’s viewpoint more likely to decline further.
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About
My name is Arpan and this is my blog! I'll be writing about things I find interesting, and hopefully some stuff that you might too. Some posts are intentionally controversial and are intended to provoke discussion. Don't be shy!
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