Tuesday, December 30, 2008

Oil is not well - 2

The brave have fallen, and they have fallen hard in the times. Oil was one of the best performing commodities in 2008 till it started falling, and fell it did hard.

Now literally on its knees, people have shunned it like a pariah.

Just to give you a relative perspective let us see the following commodities which are off from their 52wk highs

Commodities % drop from their 52wk highs
Oil 75%
Copper 70%
Nat Gas 57%
Silver 50%
Gold 15%

So, in 2008 - commodities have fallen hard and the related stocks in many cases have performed worst. Thus, naturally - the majority have gone foul on commodities many proclaiming, 'the bust of commodity super cycle'.

But we dont think so. The argument that demand destruction is greater does not hold good when it is seen in the light of the fact that the new resources of commodities are being increasingly getting more expensive to get into production. Eg. shale oil in Canada needs atleast $80 a barrel of oil price to make the project viable or roughly 70% of the new exploration in gold mining is done by juniors and by the way HUI index fell to 150 levels, has raised serious questions about the ability of the juniors to get capital to carry out the existing projects or start new ones and coupled with low gold prices, it is definitely impacting the ability of new production to come above the ground in time.

Moreover, China which now has a much greater role to play in commodity markets as it is one of the rice setters due to its consumption binge, is now gearing up to increase its GOLD AND OIL RESERVES which is being increasingly seen as strategic commodities by its top policy makers.

Like: Zhang Guobao, head of the National Energy Administration, said:

The severity of the economic downturn has brought a marked decline in demand for oil and unprecedented pressure on prices. The amount of crude oil on the international market still far exceeds global demand.

China will push ahead with building the second phase of its strategic oil reserves, having largely completed the first, Zhang said.

One of my friends working in Cairn India, is worried these days about the price of oil going down. But I see his worry not lasting too long, due to the supply issues rearing up their heads soon enough.

For future, prices estimated by the experts are the following and on the upper side of the $38 a barrel it is trading at today.

For 2009
Deutsche Bank is estimating average price of oil @ 47.50 in 2009
Merill Lynch @ 50
Moodys @50
Goldman @45 but drop to $30 in first quarter
Marc faber is buying oil at these prices
Jim Rogers says oil will reach @200 in 2013

Now I would go by the last two experts as over the years they have been proved right again and again.
So gear up for the next up leg in oil which is not going to be pretty until and unless you are invested in it.


Thursday, December 25, 2008

Oil is not well

Layman out there across the world is rejoicing as oil prices come around $35/ barrel. The conventional thinking goes 'see we told you the fundamental did not justify oil @
$100'. But nothing can be far from the truth at this point in time. Like a rubberband - the more the prices will contract, the more the projects of oil exploration will get delayed and thus lesser the supply will be when it is called .

The drop of oil price by 67% in less than 6 months is unprecendented. Never before we have witnessed such as crash this fast.
The price right now oil is hovering is breaking the camel's back in the economies which pre-dominantly depend on petro dollars for the budget surpluses.

Countries like Russia, Venezuela and Iran are vehement supporters of Oil prices around $75-90 per barrel. Otherwise this is going to be disastrous for the budgets and thus stability of the regimes in these countries. Eg. "Initially, Russia was hit with a huge exogenous shock when its terms of trade deteriorated sharply because of the sudden fall of oil, gas, metals, and other global commodity prices. With current commodity prices, the country's exports next year could plummet by some 40 percent in current dollars, or by $200 billion. Budget and current account surpluses will quickly turn into deficits." - source- http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1086

Where are all the talks of speculation right now, I heard them a lot when oil was at $147 a barrel. The contango right now in the oil futures market gives you an instant profit of $10-12 a barrel instantly and that smacks of someone trying to short oil in huge quantities in the markets.
And hence the smart oil producers are buying oil in the spot market, and selling them in futures.

Markets as efficient as they might claim to be are not working as they are supposed to. If you have seen prison break season 4, you might relate the happenings in these markets being manipulated by a COMPANY for their own gains. Slowly but steadily - POWER is being concentrated in few hands and corruption is running rampant, and to give ourselves a false sense of optimism and security - WE CRY: SEE I TOLD YOU SO.

Wednesday, December 10, 2008

New investment themes for 2009 (1 of 4)

The times are extremely volative right now. No geograhical region, no asset class world over worth investing in with enough liquidity has been spared due to the crisis we are in right now.

As Marc faber pointed out in the latest of his reports, whenever volatility has been more than the average of past recoreded period, say a decade, returns on investments in equities have not been good. Only the saviest of investors are able to wade through all the noise, called volatility.

So, going ahead into 2009, one of the primary questions in front of every investor, trader, speculator is what theme to get into, what to invest into.

Also, I should remind a cliched statement, that in every bull run a new sector has taken the lead to suggest the change in leadership.

So, i intend to write a three part blog, covering the investment themes that can be looked into and invested for the next upsurge in equities, when it starts here in India and abroad.

To cite these themes, I believe
  1. Agriculture
  2. Energy
  3. Precious metals

are the places where fortunes of the next century will be made.

So, see you in next post.


Thursday, December 4, 2008

ECB rate cut release - 4th December 2008

4 December 2008 - Monetary policy decisions
At today’s meeting, which was held in Brussels, the Governing Council of the ECB took the following monetary policy decisions:
1. The interest rate on the main refinancing operations of the Eurosystem will be decreased by 75 basis points to 2.50%, starting from the operation to be settled on 10 December 2008.
2. The interest rate on the marginal lending facility will be decreased by 75 basis points to 3.00%, with effect from 10 December 2008.
3. The interest rate on the deposit facility will be decreased by 75 basis points to 2.00%, with effect from 10 December 2008.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.
European Central BankDirectorate CommunicationsPress and Information DivisionKaiserstrasse 29, D-60311 Frankfurt am MainTel.: +49 69 1344 7455, Fax: +49 69 1344 7404Internet: http://www.ecb.europa.eu
Reproduction is permitted provided that the source is acknowledged.

Wednesday, December 3, 2008

US government default risk grows

Derivatives are still the Neutron bomb waiting to explode. Despite all the stupid things that Bernanke and Paulson are doing in order to 'supposedly bailout' the US economy, I still admire their ability to have averted the meltdown so far, along with the supression of key asset classes in order to incur profit only to the US government.

CDS, one of the many soldiers of PONZI finance, is supposedly a financial instrument which is an indicator of the 'probability of default' of an entity. CDS when the times were good made a lot of money for a lot of people, a lot of time. But, now the tables are turning. Why is this the case? Let us look at the history....

The graph below is that of Iceland, when market sensed that there was a growing probability of Iceland defaulting on soverign debt, CDS exploded skywards.

And the implosing was so suddent & voilent that participants did not have the time to get out and were caught with tails between their legs.

Similar fate happened to AIG. Again we see a lone standing skyscraper before the mighty went tumbling down.

Bear Sterns met the same girl down the road.

Now let us see the graph below. The CDS on the 10 Yr treasury notes has jumped 4 times in value from January 2008.

That means the market - pack of Wolves sense that US government is 4 times more likely to default on its soverign debt today, compared to start of the year.

And with the latest pleadge of backstoping the industry with $7.76 trillion 'unprinted money' uptil now, I am sure we are going to see rise in premiums. The thought of US defaulting on its debt may be unthinkable to all of us, but so were the siutations that have developed over the past 1 year.

Keep tight because, pack of wolves would run wild the day US defaults on its debt, and considering the imploding CDS spreads, that day does not seem to be far.