31 May 2009

Will You Be Punked by Political Peak Oil?

Update2: This UPI piece discusses the likely demand destruction on the overall economy caused by the current premature raising of oil and gasoline prices. This is not a good time for the strong-arm price manipulators of politicians, big international speculators, and oil dictators to be pushing oil prices beyond market factors.
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Update: Commenter James objects that the chart above should not be taken as too ominous a sign of future economic woes. This analysis from Global Economic Trend Analysis appears to support James' rather relaxed attitude toward the ARM reset schedule. I recommend a reading of the links under both images of this post, top and bottom. Unfortunately, ARM resets may turn out to be the least of our problems.

It is the prematurity of all the recovery talk that makes recent oil price jumps appear so clearly manipulated -- at least in large part. It is true that recent low oil prices have led to production slowdowns in existing fields and delayed exploration and development of new fields. In addition, political peak oil -- the suppression of fossil fuel exploration, discovery, recovery, and refining instituted by the Brocko Bomba administration in conjunction with the Nancy Pelosi congress in the name of carbon hysteria -- is another part of the problem. Political discord in Nigeria and the middle east is another. And of course, OPEC countries plus Russia are collaborating to prop up the world market price of oil via production caps. Lastly, big international commodity speculators are pouring their assets into oil as a hedge against a predicted US fiscal catastrophe under this inexperienced administration and incompetent congress.
Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don't always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year.

The 12 member countries of the OPEC cartel voted in Vienna on Thursday to maintain output at current levels rather than increase supplies in order to bring some relief to consumers, particularly in the gas-guzzling West. The OPEC oil ministers, whose countries account for about 40% of the world's entire crude-oil supply, also renewed their commitment to stick to their agreed quotas, rather than ship extra oil, as they began doing last April when several members ignored their agreed output limits. OPEC leaders, many of whose economies are heavily dependent on oil exports, have struggled to stabilize prices at a level that suits their own economic needs amid falling demand and rising supplies. Prices had rocketed to a record level of $147 a barrel last July before plummeting to $30 just five months later and beginning a new climb. (See pictures of South Africa's oil-from-coal refinery.)

Oil analysts believe OPEC's decisions on Thursday could help push oil prices even higher; oil futures on the New York Mercantile Exchange have risen 36% in just two months, to about $63.46 a barrel on Thursday. And that appears to be on track to achieve targets set by OPEC leaders. Saudi Oil Minister Ali al-Naimi - OPEC's key power player - said Wednesday that oil prices ought to rise to between $75 and $80 a barrel by the end of the year. "Demand is picking up, especially in Asia," he told reporters puffing alongside him as he jogged through the streets of Vienna. "The price rise is a function of optimism that better things are coming in the future." _Time
It all depends upon an economic recovery that is running on fumes, and due to hit some very large obstacles in the near future. Some very smart analysts and speculators are betting on oil going up near $100 a barrel toward the end of 2009. But we are still in the earliest, rosiest, most honey-moonish stages of the Bomba presidency. All of Brocko's moves up to now have been clownish and inept -- to informed observers (not to the media of course).

Considering all the conflicting forces in play, higher oil and gasoline prices through the summer appear likely. But as the demand destruction from price manipulation plus political peak oil begins to choke off economic activity and demand for fuels and commodities -- once again -- the nascent "recovery" is apt to die soon after childbirth. Choked by not-so-loving step parents and state guardians. Shortly afterward, the next round of financial collapses should hit.

The global economy is in ICU, and global speculators + OPEC and friends, with the friendly cooperation of western governments, are trying to squeeze the near-corpse for everything it can give. Not very smart.
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H/T Survival Blog

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Anonymous Anonymous said...

Hello Al,

The one thing I don't get about your first chart on ARM Resets:

After an ARM resets, isn't it true that rates are then set as some base interest differential plus libor?

Isn't libor at .66%?

Doesn't that mean the interest rates charged to those with resetting ARMs will reset to around 4-5%? How will that cause problems?

I realize that if the economy picks up, and libor rises, then these ARMs will become a problem, but at that point, the rising interest rates and accompanying defaults will be in the backdrop of a rising economy.

Granted, there are lots of things wrong with the economy, such as rising unemployment and continued foreclosures from those who lose their jobs. But it doesn't seem like your chart is particularly relevant.


Sunday, 31 May, 2009  
Blogger al fin said...

Well, perhaps, and certainly the chart is not the main point of the post. There is a lot more going on than the particular batches of resets coming up in a year or so.

The point of the posting has to do with a "false spring" reflected in rising oil costs.

Things are a bit more complicated than what you describe, however. Just as the risk from the last slew of resets was vastly understated, beware you do not do the same for the next.

No one knows what LIBOR will be when the next resets hit. Different loans will be impacted a bit differently.

Sunday, 31 May, 2009  
Blogger Unknown said...

Different loan programs use different libor rates, but the one thing the first commenter doesn't take into account is that the Option ARM resets are based on a higher principle balance, sometimes as high, again depending on the particular loan program, as 150-175% of the original principle balance. Surely that will affect the ability of borrower to repay after resets, even with a lower libor.

Sunday, 31 May, 2009  
Anonymous Anonymous said...

the nascent "recovery" is apt to die soon after childbirth. Choked by not-so-loving step parents and state guardians. Shortly afterward, the next round of financial collapses should hit.

I know this is kinda of prole of me to say this, but Denninger claims that the "green shoots" in the economy we keep hearing about are the dope plants our economic leaders are smoking.

As for future bubbles popping, one commenter on a sight I used to frequent stated that he thought higher education was the next bubble about to burst. Really, anything associated with the Left is financially unsustainable, and in a decade where funds are short much of the Left will go without cash - I hope.

Thursday, 04 June, 2009  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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