(Excerpt from original post by Phil Davis at Phil’s Stock World, Feb. 8)
“We should all fear Oilmageddon!”
That’s the word from CitiBank, which is supposed to be the voice of reason in these markets. When banksters tell us to get out of something, it’s usually time to get in.
Nattering Naybob had a very good summary of the week's events, reminding us of my warning that we were simply in a “dead cat bounce” and likely to fall even further. I wrote,
Some are connecting the dots so the 1859 to 1940 Standard & Poor's 500 rally could be the dead cat bounce we alluded to as the overall trend reasserts itself. I said ES could test 1930 and to wake me up when it got there, where it was rejected in a big way. I have a funny feeling this Super Bowl, Monday and week could all be ugly.
And ugly it is Tuesday, but I’ll be on Money Talk on BNN Wednesday night, explaining to Canada why the collapse of oil does not mean the Global Economy is collapsing. I’ll write it down here so you can get ahead of the game, and, as Warren Buffett advises, “Be greedy while others are fearful.”
The big problem is that most “analysts” don’t know anything more than they knew in college – especially the ones who wrote books and who, even if they know better, almost never contradict what they have published – no matter how much evidence to the contrary has piled up against them. Those who aren’t slaves to the status quo are often paid by the powers that be to steer the sheeple in and out of positions as needs dictate. Even the honest media loves a conflict – and they’ll present both sides of an argument as valid even when one side is clearly idiotic.
Getting back to oil, most people think oil pricing is a function of supply and demand. Long term it is. But short term it’s a function of sentiment and manipulation. We take full advantage of that at PSW, and I could give you a dozen examples from our 10 years in circulation but suffice it to say it’s not that hard to spot those patterns. One great pattern we observe is the fake, Fake, FAKE!! trading of oil contracts over at the NYMEX.
As you can see from the five-month strip at the NYMEX, there are 515,000 open contracts for March delivery, and that’s very high, which puts downward pressure on the price because the contracts close on Feb. 22. Not only are the storage facilities at Cushing, Oklahoma (the point of delivery) full to the brim with unwanted oil, but Cushing can only handle about 40 million actual barrels of oil per month. There is no way on earth that 515,000 contracts, representing 515 million barrels of oil, can possibly be delivered.
Of course, the traders know this, and they pull this scam off every month in order to create a false sense of demand for oil. Every month they whittle their fake orders down to 15 million to 25 million actual barrels worth of contacts (15,000 to 25,000), and the rest are fake, Fake, FAKE!!! – all of the time.
Yes, trading on the NYMEX is a complete and utter fraud, but knowing it’s a fraud helps us make money. Other than my occasional rants like this one – we could care less – certainly the regulators don’t care. This month, more than 3 million contracts will change hands at the NYMEX, representing 600 million barrels of oil – all so just 20 million can actually be delivered to U.S. consumers. The rest of the nonsense (99%) is just a game to move the prices around with U.S. consumers picking up the tab for all the fees that monthly churning generates.
There are 515,000 contracts worth of open orders for March delivery; since only 25 million barrels are likely to be delivered, they have 10 days to cancel or roll 490 million barrels worth of crude orders to longer months. Since most of those contracts are trading at a loss, and since hope springs eternal, and since humans and their corporate masters have a huge aversion to taking losses, we can expect those contracts to be rolled to longer months – only perpetuating the problem.
In addition, we know that “they” have trouble rolling more than 40,000 contracts in a single day – usually that causes downward price pressure, and they have 10 days to roll 490,000 contracts – so oil will remain under pressure until Feb. 22, when we should get a nice pop into the end of that week. Meanwhile, rumors are accelerating regarding a possible OPEC production cutback, and that’s keeping oil off the $25 line – for now. As I said, we’re playing for a bounce off $30 (with tight stops below) because we expect more rumors to lift oil into Wednesday’s inventory report.
There are over 1 billion barrels worth of FAKE!!! orders for oil deliver at the NYMEX in the front four months – soon to be the front three months in 10 trading days. The U.S. currently imports just 5.7 million barrels per day or 171 million barrels per month (but not all to Cushing, of course) so the deliveries falsely scheduled for Cushing alone, in March, represent a three-month supply for the entire U.S.!
There’s problem No. 1 – energy trading is a complete and utter scam (as if Enron didn’t make that plainly obvious 15 years ago) and don’t get me started about the ICE. Oil is not racing back to $50 because $50 is not the midpoint on oil. It’s a top, and oil should never have been anywhere close to $100 per barrel. That bubble has long since burst.
Again we have to think about the rigid and limited mindset of the average analyst who thinks that low oil prices mean a bad economy because, clearly, demand must be off. That was a very solid assumption since the birth of the internal combustion engine, but now that we have electric cars and solar and wind power, it’s no longer such a direct correlation. While we do have an oversupply of oil, to be sure, it’s wrong to blame it on a slow economy.
One solid example of this is auto demand. You are probably aware of the fact that auto sales hit records in 2015, with 50 million cars delivered globally. While this somewhat represents a bump in demand, it’s mainly about replacement cars. What kind of cars are we replacing? The average age of the U.S. fleet is 11.5 years, and we can safely assume that most cars being replaced fall on the longer end of the scale. Well, the average car in 2005 got just 22 miles per gallon, and we’re replacing them with cars that get 35 miles per gallon (new car fleet average) thanks to President Barack Obama’s CAFE standard rules. And it’s not just the U.S. – the whole world is getting more efficient:
A car being driven 15,000 miles a year (average) that used to use 750 gallons at 20 miles per gallon is replaced by a car driven the same 15,000 miles a year that now gets 35 miles per gallon and uses 428 gallons. That’s 42% less fuel than the previous car! An oil barrel is 42 gallons, and it’s not all refined to gasoline, but let’s just say that each new car sold requires 10 less barrels per year than its predecessor. At 50 million cars a year that’s 500 million less barrels per year required for our auto fleet – a 1.5 million barrels per day demand cut that becomes 3Â million barrels per day in year 2 and 4.5 million barrels per day in year 3. That is where our demand is going, and it’s not coming back!
In fact, we also are getting more efficient trucks and more efficient planes and more efficient machines in our factories, and a lot of equipment is using wave, wind and solar energy for power and not using any oil at all to run. So our economy could be off to the races, and oil consumption would still be going downhill. Ironically, the better our economy does the faster the old gas-guzzling machines get replaced and the faster the demand for oil declines, but that’s a good thing, not a reason to panic.
Yes, there will be disruptions as we move into a post-oil economy – especially for economies that depend on oil. Saudi Arabia alone has enough oil in the ground to supply the world for 40 years. Sadly, it’s not likely they’ll even use half of it before oil is a fuel of the past, and that is why no one wants to cut production – despite this persistent glut that is without end – because they know they are playing a game of musical chairs with oil barrels, and they are all going to be stuck with a worthless fuel of the past with a rapidly declining inventory value.
This is also bad news for companies like Exxon (XOM, Financial) and Chevron (CVX, Financial), which are, unfortunately, Dow components. It’s bad news for the energy sector and the banks that lent them money so there will be disruption – but it’s the good and healthy kind as our society moves on from using oil and it’s not a sign of a slowing global economy. That’s why we flipped long!
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