Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - 28th July 16
FOMC Interest Rates and Their Impact on the US Economy - 28th July 16
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Crude Oil Prices: Now for Something Really Scary

Commodities / Crude Oil Mar 29, 2012 - 01:23 AM GMT

By: Andrew_Butter

Commodities

Best Financial Markets Analysis ArticleIf oil prices don’t crash down to $67 within the next two months, that means for sure the evil one-eyed-drooling-spirit of Peak Oil, which everyone has been studiously trying to ignore for so long, has finally arrived.


The dotted red-line on the chart is the “fundamental” or if you use International Valuation Standards, the other than market value.  That roughly follows the algorithm:
FOOT = 3.3% TOAD/OIK

That basically says the whole world can afford to spend 3.3% of the whole world’s (nominal) GDP buying oil, so the price is that number divided by supply (or consumption – same thing). That’s also called Parasite Economics insofar as the seller of oil needs to judge it right so that he sucks just so much money out of the golden cow (Daisy) so that she stays healthy, it’s a delicate balance, suck too much and Daisy can get mastitis.

http://www.marketoracle.co.uk/Article30202.html
http://www.marketoracle.co.uk/Article24849.html

The Parasite Economics line can be calibrated using the algorithm:

E2 = MC

That’s The General Theory of the Pebble in The Pond which is another way of saying “what comes around goes around”; it allows you to figure out where the fundamental was after a bubble/bust cycle, so that way you have two independent ways of working out other than market value, or in other words Daisy’s mastitis threshold.

http://www.marketoracle.co.uk/Article33780.html

That’s all very well, except there is another way to value oil in the ground, if you are a seller.

That is to let some of the less productive Daisy’s keel over and die in the knowledge that the Daisy’s that survive will be the strong ones, and they will produce baby Daisy’s who will be more productive in terms of delivering the golden milk, when they grow up.

That’s called “Survival of the Fittest”. The idea there (if you have oil) is that you need to price it according to what other people (your future competitors) are going to have to pay to find, develop, and ship to market, oil that so far hasn’t been found or developed.

That’s called the replacement cost, and if you judge that will be more than the cost to you of foregoing income today, and then making 2% a year parking that in U.S. 10-Year Treasury bonds, and instead just waiting, for the price to double, in ten years, and selling it then.

And here’s the rub, the longer Ben manages to duck and dive to keep the yield on the 10-Year at or around 2% to “stimulate” bankers and to help USA to pay the interest on their mountain of debt, the more attractive the idea of just sitting looking at your oil, rather than selling it, becomes.

That sounds as if the Big Idea behind letting all the morons who can’t pay their debts off the hook; might have some unintended consequences.

So which Daisy is going to get the bullet in the head first?

Not many people know this, and those who do would often prefer not to know it, but the way that America finances her current account deficit (that’s basically the balance on goods and services), is by selling securities.

Those come in three main flavours, from the BEA numbers on International Transactions, Line 58 is US Treasuries sold to foreign governments (net), Line 65 is Treasuries sold to anyone else who is foreign (those are the guy who have to queue up under a big sign that says “aliens” at Miami Airport), and then there is Line 66 which is “Securities Other Than US Treasury Securities”, commonly referred to as Toxic assets. Those sold great up to 2008, but the sparkle has kind of dropped out of that market. Add all those together and you get to the amount of money from foreigners that can be used to buy foreign stuff…a lot of which is oil.

This is the rub, when the amount of money coming in from selling the birthright of America to foreigners, so that everyone in America can drive SUV’s and the politicians can boast about how they are committed to keeping gas prices less than $4 a gallon, which makes it cheaper than gasoline in Saudi Arabia, and is an explicit subsidy…when the amount of money America can borrow to pay for that luxury…is not enough to pay for it (that’s when the orange line in the following chart goes below zero)…there is trouble in store.

Oh My!! When oil prices go up above the “fundamental”, look-see, America IS IN TROUBLE, as in they can’t even borrow enough to support the lifestyle that they have become accustomed to.

Looks like Daisy will have to start producing more milk, or she might not be getting her feed tonight!!!

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe. Ex-Toxic-Asset assembly-line worker; lives in Dubai.

© 2012 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife