Sunday, 11 May 2008

The oily bubble is getting blown

It is really disappointing to observe lately what is going on in the markets, especially commodity markets and energy commodities in particular. Over the last three-four weeks, the amounts of lies and fake news that are being released by the Talking Heads have exceeded all reasonable logical and illogical limits. I started collecting those stories, and I am sure we will hear a plenty more over the next several weeks or months of the crazy oil and gas rally.

Let's look at what is being fed to the speculator-infested commodity markets lately:

First, there are some mythical crazy rebel maniacs in Nigeria and other African countries who persistently (and conveniently when there is nothing else to feed the news-lines) blow up pipelines of Western oil companies in Africa. Show me just one hole in the pipeline. Show me just one rebel, alive or dead. Let me hear him talking about why he hates the pipelines so much, who provides him with the explosives and tells him where and when to blow the bloody thing. Please enlighten me how one pathetic pipeline in the middle of the African nowhere can disrupt the world's total supply of oil. Since when Africa became the key oil-producing region? I thought the oil comes mostly from the Middle East, Russia, and South America. Well, apparently the analysts know better.

Second, we were recently told (again) that Ugo "Evil" Chavez apparenty can't stop thinking about cutting off the U.S. from the Venezualean oil. They are trying hard to convince us that somebody somewhere uncovered a 100+ computer files that prove that this such and such $%## has "closer-than-expected" ties with the Colombian rebels. Of course, the biggest world democrasy can't just stay away from this matter, and the bad guy Ugo needs to get a good public spanking by Uncle Sam. And of course, the brilliant analytical minds on Wall Street use a sophisticated deduction method to create a smart link between a computer file and the price of oil. Ethemeral files in an ethemeral notebook of an ethemeral rebel killed in green jungle contain Ugo's name and clearly demonstrate that he is into something bad and has those bad close ties with those bad bad guys. Wow, a rebel with a notebook writing about Ugo in the middle of the jungle hell! Skip several steps in the sophisticated cause-and-effect chain and here we go - the oil should be more expensive because this bastard in Venezuela will stop sending oil to the U.S. very very soon.

Third, those bloody unions in the U.K. are disrupting the whole oil sector in the U.K. and the EU. We can do absolutely nothing about it in this situation because we are big-time democracies and we should respect the rights of our precious workers to go on strike when they think it is necessary. However, the questions arise in this regard: Are the workers severely underpaid in this sector? Who tells them to go on strike? When do they tell them to go on strike and why? Was there really a strike after all? Would it have had any material impact at all if it actually had happened?

Fourth, there are constant reminders that there is a strong and growing demand for oil and gas in India and China, which stays robust ans is expected to continue its upward trend even in the middle of the current economic turmoil. This news makes me want to go to China and India and live there happily thereafter amid the never ending economic boom and bounty. But wait, I thought that China's well-being largely depends on its exports to North America and Europe. The latest cooldown in consumer demand in these regions can't help boosting China's ability to produce and sell their "Made in China" goods. Many of India's rapidly developing industrial and serivce sectors were doing great up until recently thanks to a strong trend in outsourcing among Western companies. If there is nothing to sell in North America and Europe due to the weak local demand, then it is not going to be much to outsource either. The exponentially growing internal consumption in India and China? Maybe, but look at their inflation rates and look at their still huge income disparities. Most people there will be struggling to get by in the coming years, facing food shortages and high food prices. Then why would you need a lot of oil there? To grow rice? To ride bicycles? When Western countries are getting one economic punch after another, China, India, and other quickly growing developing countries can't just continue flourishing as if nothing happened - they will go down too because their economies are too much dependent on the Western demand for their products and the Western investment. I am not buying this story.

Fifth, every week we hear that oil and oil product inventories in the U.S. keep shrinking although in reality they exhibit the opposite behavior lately - they keep growing. Well, then we are told that, if not this time, then next week they will shrink for sure. Besides, the US economy will start its strong ecnomic recovery any day now, and then oil will be in such a huge demand and we are unfortunately unprepared for this very realistic scenario with our meager oil inventories. By the way, who can confirm that oil and gas invenories are at the levels they are reported at? George Bush? Smart Ben? Uncle Sam? Who counted every single barrel or litre or cubic meter of these intentories and can prove that they are indeed there and not on paper only? (hey, who can prove that the U.S. gold is still at Fort Knox? :-))

Sixth, every month there are never ending recurring speculations that OPEC countries will cut off their production to keep oil prices high. Well, Uncle Sam, you (in very abstract theory) are controlling Iraq's pipelines now, you have been keeping Saudis, OAE, and Kuwait on a political, military, and economic leash, why don't you still control OPEC's oil supply? I know, it is all Iran's fault. Go get them, tigers.

Seventh, for some mysterious reason, amid the apparently booming world economy and extremely strong demand for oil, poor refineries are just getting by on the brink of bankruptcy and therefore have to cut their production for several weeks in a row now. Why is that? How do they face operating losses when the price of oil skyrockets and the difference between the cost of oil extraction and the final price is widening like nothing else? Nobody cares about poor little refineries, and bad big oil-company boys are taking all the profit money? Who in fact controls the refinery business? Are they affiliated with oil companies? Why do they conveniently have multiple maintenance closures when the price of oil wants to slow down or go down? Why are deadly fires and accidents taking place in some of them when the timing is right? Hmmm.

Eighth reason is my favorite, heard forn CNBC several weeks ago when I was in NYC (hotel stays are the only time I watch TV). Apparently Saudis and other major oil producing countries are deeply concerned about a quickly approaching shrinkage of their oil reserves. The good ol' oil fields are being depleted like there is no tomorrow, and there are no new big deposits in sight. Besides, apparently, oil extraction is getting more and more difficult and more and more expensive, so the opearing costs of oil producers skyrocket. Please give me a break. I know what's been skyrocketing lately: bonuses of oil executives, profits of oil companies, the size and luxury of their headquarter offices, numerouos management perks, etc. Not a long time ago, the operating costs of extracting oil in the Middle East were around $1-3 per barrel. OK, double it now to account for inflation and still double or triple more for higher transportation costs. $40, maximum $50 per barrel is the upper limit of the economically justified price of oil. I just do not believe any of the economics behind the $125 oil. The inflation and worthless dollar stories are not doing the satisfactory explanatory job here.

Ninth, there are assholes like whose Goldman Sachs and other Big Firm analyst slaves and their masters who throw in masterfully timed and engineered statements about a $200+ oil. These are the so called energy experts whose opinion for some strange illogical reason is still valued by the markets and who are using their access to mass media to justify the incredible stories of why oil should be priced 100% more than it is today and 400% more than it was just several years ago.

Tenth, you insert your own story...

Although I was being a bit sacrastic in the overview of some of the "expensive oil" reasons, the subject is not funny at all. It is not a secret that energy commodities lately are turning into another bubble area where the speculator money inflows are very substantial and are accelerating fast. We are not talking about physical commodities here any more. These are not the same commodity futures that originally served a very useful purpose of hedging and a guarantee of future delivery at specified prices. Now, it is just another intrinsically worthless paper that is used solely for speculation. I will not be surprised if the volumes of outstanding commodity derivatives, which de jure imply the presence of physical delivery of a physical commodity, in fact exceed (multiple times) the total volume of all discovered and undiscovered oil and natural gas reserves of this planet. Look at who is trading oil now! Funds, governments, government entities, banks, companies which are completely unrelated to the energy sector, individuals... Hey, even I am there, getting my valuable experience on how commodity markets operate and how people are getting screwed there big time for big bucks.

I think that some strong regulatory action needs to be introduced into these markets. Honestly, if I were in charge, I would impose a mandatory physical delivery of energy commodities. Do you need 1,000 barrels of crude oil deliverd to your little backyard or your fancy office in a month? No? Then get out from here, silly, and let only those who need price hedging and actual product delivery be involved in these markets. I guarantee that the prices of energy inputs and products will drop drastically if the real-delivery component is introduced into the system. The oil will cost what it is supposed to cost - $30-40 - not more. Will it happen in reality? Maybe sometime in the future. Definitely not now. We have too much worthless paper money chasing only a small quantity of physical inputs and products, but huge volumes of paper which is supposed to represent current and future products, goods and services. Occasionally, these paper instruments lose credibility from the public, and the masters and their slaves design new toys and inflate a new bubble to keep the gazillions of worthless dollars and other fiat currencies circling the little blue planet and generating real wealth for just of few of players.

Meanwhile, let's continue watching the show called "who is going to be the greater fool in this pricing game."

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