In Memoriam: Cheap Oil

An article from today's Rude Awakening newsletter, which takes a look at oil supply and demand:

By Eric J. Fry

The world will not run out of oil any time soon...just
CHEAP oil...

So says a fascinating report that bears the title: "The
Death of Cheap Oil." The report's author, Steve Belmont,
Senior Market Strategist for the Rutsen Meier Belmont Group
LLC in Chicago, lays out a compelling - and somewhat
frightening - case for much higher oil prices.

Admittedly, oil prices might retreat a bit over the near
term, as evidenced by yesterday's $1.20 slide to $45.28 a
barrel, but Belmont believes the price of crude oil will be
much higher by the end of 2006 than it is today. He bases
his bullish call on the inevitable - he believes - clash
between shrinking supplies and soaring demand. To preview
his conclusion: Buy long-dated call options on crude oil.

In Today's Rude Awakening we highlight the first half of
Belmont's argument: oil demand. Tomorrow we'll examine the
supply side, while also revealing Belmont's suggested
course of action.

"Oil prices are vulnerable to a perpetual state of shock,"
Belmont's report begins, due to a 'new era' of soaring
demand, depleting supplies and semi-permanent geo-political
tension, especially in the Middle East. "The $40 per barrel
peaks of the past decade could easily become the floor of
the next," Belmont predicts. "$70, $80 or even $100 per
barrel oil is not only possible, but probable in the coming
decade."

As the Asian economies continue industrializing, the report
points out, demand for oil will soar...or at least it
should. "Total global demand for crude oil is currently 80
million barrels per day (MBD)," says Belmont. "Of those 80
million barrels per day, America's population of 293
million people consume roughly 22 MBD. Meanwhile, Asia's
3.6 billion people - well over 12 times the size of the
U.S. population - consumed just 20 MBD. Should Asian per-
capita-consumption rise from its measly 7% of U.S. per-
capita demand to a mere 14%, the market would have to
supply an additional 20 million barrels of oil per day.
This is one-fourth of today's entire global demand...

"Let's look at it another way," says Belmont. "U.S.
consumption of crude oil is roughly 28 barrels per person
per year. South Korea's annual per capita consumption is
17 barrels and so is Japan's. These are both developed
Asian nations. China is rapidly becoming a developed Asian
nation, yet its per capita consumption of crude oil is only
1.7 barrels per year." But Chinese demand is racing to
catch up. Crude oil imports to China jumped a whopping 33%
last year.

But, says Belmont, the bull case for oil does not rest
entirely on the magnitude of demand, but also on the
rapidly changing structure of demand. Now that the Chinese
are maneuvering to secure long-term oil supplies, for
example, future supplies available to other buyers will be
reduced.

The Chinese are actively negotiating to secure long-term
supplies from countries as geographically and politically
diverse as Canada, Saudi Arabia, Iran and Russia. Indeed,
the Chinese and the Russians have embraced one another in a
kind of petro-political bear hug. "When it comes to the
classic relationship between a natural resource producer
and a natural resource consumer," says Belmont, "no two
nations appear more perfectly matched than Russia and
China. Russia produces far more oil that it consumes.
China consumes far more oil than it produces. Both share a
Communist past, a long border complete with road and rail
links, and a history of uneasy relationships with the
world's largest oil consumer: America."

This commercial relationship is spilling over into the
political sphere. For the first time ever, the Russians
recently agreed to hold a large military exercise together
with China on Chinese territory. The exercise will take
place in the second half of the year and will include
'state-of-the-art weapons', according to Russian Defense
Minister, Sergei Ivanov.

As these former Cold War allies draw closer politically and
militarily, they will also draw closer commercially - a
trend that is likely to divert a growing share of Russia's
vast oil supplies away from world markets toward the
thirsty Chinese economy. "Now the China has entered the
game," says Belmont, "America will find itself competing
for shrinking supplies at every level. Over the long haul
that can only mean one thing - higher prices."

Meanwhile, as China and the rest of the world ramp up their
oil consumption, oil production is peaking. The world has
consumed an estimated 1 trillion barrels of oil since the
drilling of the first well in the mid-1800s - almost half
of known recoverable supplies. And no new giant oil fields
have been discovered recently. In fact, discoveries of new
oil reserves peaked in the 1960s and have been declining
rapidly ever since. U.S. oil production peaked in 1970;
North Sea oil production peaked in 1999.

"Given the likelihood that world crude oil production
cannot rise much above 90 million barrels a day," observes
Kevin Kerr, the man behind the Resource Trader Alert, "and
the fact that world demand will easily reach 90 million
barrels per day by the end of 2007, there is little chance
of cheap oil returning. It is unwise to count on sustained
oil prices below $35 to $45 per barrel to ever return
again. You're far more likely to see $100 oil than $35 oil
again."

The Rude Awakening is published daily alongside it's parent publication The Daily Reckoning
more...

Reynolds Options Advisory Newsletter

The EWI Stable Currency Benchmark

Bob Prechter, President of Elliott Wave International and author of books such as "Conquer the Crash", unveiled the EWI Stable Currency Benchmark in his November 2004 Elliott Wave Theorist.

If you don't know about Elliott Wave analysis, now would be a good time to start learning. You can find out more about it here: Elliott Wave Theory

Here's Bob Prechter's reasoning behind the new benchmark, in his own words:

"It's time to divorce our measures of value from individually (mis)managed currencies. Currency yardsticks are made of such elastic rubber that when one perceives change of value in something measured in currency units, nine times out of ten it is a change not in the thing measured but in the yardstick itself. The values of the U.S. dollar, the yen, the euro and every currency on earth fluctuate wildly all the time. Gold is the truest universal value benchmark, but it is impractical for use as an investment benchmark because fund managers cannot move their assets in and out of gold; the costs are prohibitive. Therefore, I have devised a new benchmark that is designed to be a stable representation of global purchasing power. EWI's new Stable Currency BenchmarkTM (SCB) comprises equal-value portions of the Swiss franc, the Singapore dollar, the New Zealand dollar and the U.S. dollar. Each currency is the most attractive one within its global quadrant – Europe, Asia, Oceania and the Americas – from the standpoint of political and fiscal stability. Three of these issuing countries have been politically neutral for a long time, a major advantage in wartime. Some of these countries have more political than fiscal stability, and vice versa, but in my judgment these are the ones whose currencies are most likely to withstand the pressures of a global depression and the social upheavals that will accompany it.

Undoubtedly with sentiment toward the U.S. dollar near an all-time low, some people will complain that the dollar should not be in the mix. This is one reason why it should be in the mix. Most investors and advisors get bearish after a 3-year decline, not before. They load up on foreign currencies just when their own is ready to recover. Three years ago, people would have complained that there were not enough dollars in the mix. The whole point of holding funds in the SCB is to stabilize one's global purchasing power. When one currency is weak, the others are usually strong. The fluctuations tend to cancel out, leaving a stable benchmark of value in a worldwide setting. The accompanying charts show the SCB as the benchmark against which individual currencies fluctuate. Figures 9 and 10 show the SCB against its components on two time-frames, and Figures 11 and 12 shows it against some other major currencies. Needless to say, most minor currencies have been downhill against the SCB.

One must refrain from making judgments about the individual currencies in the SCB based on their value histories from 1971, the year that currencies were freed to float. Beginning in 1978, or 1988 as you can see in Figure 10, gives a whole different look to the U.S. dollar and the Swiss franc. Beginning in 1992 would give a new perspective on the New Zealand dollar. Finally, the past is not the future, and my judgment on these selections is based as much on expectations as on past performance.

The benchmark will be adjusted on a quarterly basis to ensure that there are equal-value portions of the four currencies in the mix. The basis for adjustment will be their value in terms of gold. The SCB, as long as its components remain under the purview of sober governments, should be “as good as gold” in terms of maintaining value and better than gold in terms of cost and liquidity.

You may think of the benchmark as a new currency. You can measure anything in the world against it, thereby sidestepping wild individual currency fluctuations. The diversification inherent in the SCB mitigates the risk of choosing to hold your assets in one currency if that one were to get hammered during a global meltdown. It also gives you a consistent measure to value the price of goods, services, stock indexes or anything else. If you own stocks in a foreign country because its stock market is rising, you might lose the value of the gain in a depreciating currency. The SCB gives you a way to value all the world's investment indexes with a stable benchmark, which will thereby reveal if it is truly in a bull or bear market in terms of global purchasing power. Figure 13 shows the DJIA, the Nikkei and the FTSE indexes against the SCB, which factors out local currency fluctuations to give you truly comparative values. I am personally intrigued by the clarity of the five-wave decline in the DJIA from its all-time high, a pattern masked by the nominal Dow's denominator of depreciating dollars from 2001 to the present.

Whether you are a global fund manager or a sophisticated, globally oriented investor, I hope you will find this benchmark useful in coming years..."

Get full details about it here: The Stable Currency Benchmark by Robert Prechter.

Keep up with the benchmark at this new site dedicated to the benchmark: www.stablecurrencybenchmark.com
more...

Reynolds Options Advisory Newsletter

On with the motley!

Hello! My name is Tony Wood and I’d like to welcome you to the Trading Systems Blog. The idea behind this blog is to provide not only reviews of trading strategies and systems, but also to comment on and (try to) explain the goings-on in the world which are responsible for market movements. To make sense of all the data in all its combinations is a mammoth task, so I’ll be looking at snapshots of particular sectors, seeing what influences are at work and then taking out the crystal ball to try and predict what lies ahead.

What’s this I hear you say – a day trader looking at market fundamentals? Seems to be a contradiction there. Surely us traders just look at charts, patterns, signals, retracements … yeah, sure we do! But doesn’t coming to grips with the fundamentals make it just that much more interesting? Of course it does – that way we need never switch off … every time we see a 1c increase in the price of gasoline at the pumps, it’ll be a reminder to check whose pumping how much oil where and its effect on commodity prices, and the knock-on effect to prices in the stores, labor rates … … the dollar … gold … climate change … all these interactions, which seem to go full circle.

Incidentally, did I tell you about the Midas Trader Club? No? OK, here’s the deal --- I’d highly recommend you go and sign up for it now. You can do it here: http://www.online-trading-systems.net/invitation.html
You’ve got nothing to lose and everything to gain. As a member you’ll be getting the inside info on the new systems I’m regularly trying out, plus access to lots of free resources, reports, software, etc, as I come across it. Much of it you won’t easily find elsewhere. So go on, sign up now … then come back and continue reading !!!

Now then, where was I? Oh yes, the global markets. If you’re going to be a well-rounded citizen and a credit to society, you owe it to yourself --- and the rest of mankind --- to know what’s going on around you, globally speaking.

And just so you know, I’m **warning** you now – so don’t say I didn’t tell you! I could be classed as something of a sceptic, a cynnic, and certainly a contrarian. Or should that be “contrary”? Quite possibly. Anyway, if you want to learn the **truth** behind the latest news reports in the popular media; find out whose **really** responsible for the decline of the greenback; like to know the best place to stash those gold dubloons you’ve been hoarding for years; or simply want to hear the latest **conspiracy** theory – you’ll get it all here.

I’m not asking you to agree with me – in fact I’d **hate** that. But come along for the ride – I’m sure we’ll have some great debate.

Now - on with the motley!

more...

Reynolds Options Advisory Newsletter