Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Post Yellen = Market Confusion - 28th Aug 16
Theresa May Instructs Police, NHS Gp's, Public Sector To Stop Racial Discrimination in Service Delivery - 28th Aug 16
Ignore Yellen and Buy the Dip in Precious Metals - 27th Aug 16
SPX Downtrend Should be Underway - 27th Aug 16
Unraveling the Secular Economic Stagnation Story - 27th Aug 16
The Precious Metals Sector and the Fed. . . - 27th Aug 16
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy - 3 Secret Charts

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