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Catching a Falling Financial Knife

Crude Oil Price BUBBLEOMIX Forecast 2013

Commodities / Crude Oil Feb 18, 2013 - 05:11 PM GMT

By: Andrew_Butter

Commodities

When the Penny Drops that U.S.A. will be Energy Independent by 2030…

There is an excellent presentation by BP’s Chief Economist which you can find on their website http://www.bp.com...

He hits all the right nails bang on the head; (1) over the past decade 50% of America’s trade deficit was the cost of buying energy abroad, mainly oil; (2) the amount of GDP you can get from burning one barrel of oil is going up, (3) within ten-years and perhaps sooner, U.S.A. will become energy independent for the first time in fifty years (5) Peak Oil isn’t even worth talking about (6) the reason U.S.A. got into shale-gas and then tight-oil before everyone else is that in spite of all the hand-wringing and leaving aside George-W as an isolated exception-to-the-rule, economically it is still the most free place with the lowest level of government-sponsored stupidity and/or cronyism, in the world; apart from isolated pockets such as Hong-Kong, Singapore and Dubai. Well he didn’t actually say that, but in so many words, and (7) implicitly, one of these days that technology is going to be exported.


OK, don’t mind the accent; I suspect he is Swiss-French but brought-up in a Swiss-German area, you got to watch out for those-guys, they are precise as the Germans but as slippery as the French!!

Freddy Hutter http://seekingalpha.com... tells me that what happened to oil in 2008 and 2009 was not a bubble-and-bust. Apart from that he says he agrees with me which kind of weird’s me out coz that’s a big area of disagreement. For me that was about as perfect an example of one of those as you will ever find. Like those perfect waves surfers ramble on-and-on about when they get stoned; that you get once in a ten years where the wind has been blowing straight offshore for a week but two-hundred-miles away there was a big storm pushing up a swell the other way.

According the theory of BUBBLEOMIX you can figure out precisely where the mean-sea-level is when sitting on your surf board getting bumped by the locals, from just two pieces of data downloaded from your Go-Pro. All you need is the top of the wave and the bottom of the trough, multiply those two numbers together and then take the square-root and you have your answer. In that analogy the mean-sea-level is the “fundamental-price” or if you want to get technical, what International Valuation Standards calls the “other-than-market-value”.

What that says is the amount of money that was spent paying too much for oil during the bubble, which in 2008 was about $165 billion, is exactly equal to the amount of money that was not paid, i.e. “saved” by people who paid too little during the bust.

That’s called the theory of what comes around goes around. Or if you want to get technical, long-term, markets are always efficient, but then like the man said, they can stay inefficient for longer than you can stay sober…or something like that.

Put that another way, a bubble and a bust is zero-sum, it creates no net economic value, all that happened was that one set of people paid $165 billion too much to another set of people who got lucky, and then the tables got reversed, both times there were losers and winners. But the inescapable reality is that for economy’s to be sustainable, in every transaction, both sides need to be winners.

According to me, and as remarked earlier, I am a minority of about n=1, what determines the fundamental price of oil is the amount of money in the world available to pay for it, that’s demand measured in dollars, or gold-bars, doesn’t matter. That changes over time, as the amount of dollars you can make burning oil changes, but short-term it doesn’t change much, which means that the price of oil in current dollars, short-term, i.e. over five-to-ten years, should track GDP in current dollars.



If you buy that line then all you need to figure out the “fundamental” is one bubble and bust, that gives you point “A” on the chart. As a check the amount of money paid extra in “B” should pretty-much equal the amount not paid out in “C” (you need to multiply price by production to get that http://www.indexmundi.com/...).

That’s illustrated on the chart, the assumption is of course that supply of oil is not limited, in other words at all points on the curve the suppliers, in aggregate; could always pump more if they wanted to (as in if they could find a buyer at the price they like), whenever that changes, or there is a threat it might, then things change.

Which explains why every now AM’s pretty little butterfly flaps her wings and says she has a headache three-nights in a row, so (a) AM gets in a huff and start mouthing off about how Iran has the indelible right to manufacture weapon-grade plutonium…for peaceful purposes of course, so (b) the Israeli’s say they will bomb-bomb-bomb-bomb-bomb Iran back to the Stone-Ages if they keep up with that sort of attitude…to the beat of the Beach Boys song –can’t seem to get away from surfers… so (c) AM gives them the finger and says, “we got Sunburn Missiles and we can close down the Straits of Hormuz any-day we like…LOSER!!@%”, so (d) the herds of lonely-souls who are employed to hedge exposure of airlines and so on, just in case of Acts-of-lunacy, get spooked, so (e) they place their bets and the price goes up, so (f) the Iranians get a better deal during their periodic negotiations with Indian and Chinese refineries, and then (Gee-Wiz) then everyone lives happily ever-after until Pretty-Girl-Butterfly flaps her wings again, which proves beyond a shadow of a doubt that women are the source of all evil.

According to the chart, which incidentally hardly anyone agrees with, particularly Freddy, oil has been a bubble since December 6th 2010, and since then, “someone” or a collection of someone’s have paid out $283 billion more to buy oil than they ought to have if they had paid the right price. Of course, you can’t pay the “right” price until the darn sellers break ranks and/or the hyperventilating hedge-fund managers reach for their brown-paper-bags. The problem is the way it works you get fired if you don’t hedge against a spike but if there is a bust well the way the bonuses are worked out, that doesn’t matter so much.

Whenever that happens (not if), what will happen next, as night follows day, is the red-line.

The trigger for that might be when the penny finally drops that U.S.A. will become energy independent sooner than anyone thinks. When everyone finally get’s their head around the idea that the biggest buyer in the world might leave the market-place, the sellers might well break ranks…it’s happened before, like did everyone stop pumping when the price hit $35 in 2009?

When (not if) that happens, it’s likely that the spread between WTI and Brent will go up because oil companies in U.S.A. are not allowed to sell outside, which will mean America will have a massive competitive advantage over anyone who is at the mercy of the State-Oil-Companies that run oil outside of U.S.A.

By the way, just for the record, this is the THIRD time I’ve predicted $67, so if you are not a “fan” or a “follower, I’d like to say I can take rejection in my stride, I get a lot of that, I’m used to it. This was my view in March last year:



Oh well, looks like I got timing right but not the number, not the first time that happened!!

 Funny that, it’s hard to get them both-right at the same time and calling a pop is the hardest thing.  But Hey!! Like NR says, a stopped clock is right twice a day…third-time-lucky perhaps?

So when will that be? Well, looks like the season for oil-bubbles popping coincides pretty-much with the start of Hurricane Season, maybe this time, if not it’s definitely going to be in 2015, and if it doesn’t pop then  I promise I will never write anything about oil, and I will NEVER say anything unkind about butterflies, ever again.

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.

© 2013 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

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Catching a Falling Financial Knife