Archive

Posts Tagged ‘energy’

Fall in Gasoline prices could spark a Boom

October 3, 2011 4 comments

Gasoline prices are linked more to Brent Crude than to RBOB over the last year or so.  There are complex reasons for this, but lots of it is due to not enough infrastructure here in the United States to move oil and gasoline across the country.

Brent is down about 25% right now from it’s highs, but Gasoline is only down about 12%.  If we look at a 20 day moving average – which is about 1 month of trading days  – we can see Brent has only fallen about 12% too.

Still, with the QE II trade going away entirely, we can expect the price of gasoline to fall further.  This could spark a boom.

The payroll tax cut stimulus was soaked up entirely by the increase in gasoline prices.  Now that gasoline is falling, this tax cut is beginning to be felt by the consumer.  If gasoline prices fall to 2.70 a gallon across the country – and they could fall much lower – then we could see over 1% added to GDP.

Usually, it’s about 1.4bn added to consumer spending for every $.01 drop in gasoline prices.  Prices peaked at around 3.96 nationwide, and they could fall to $2.75.     This means we could add as much as 121 * 1.4 = $169bn in stimulus when gas prices fall.

This spending is most likely subject to a multiplier of probably 1.3, so we’re going to see something like $220bn in spending, or 1.5% of GDP

We’re growing at about 1.3% for the last quarter.  1.3 + 1.5 = 2.8%

That’s not bad growth.  2.8% is near the rate necessary to make a good impact on unemployment.

 

Categories: Main Tags:

Prag Cap: Fed “Set the Table” for market Crash with QE II

August 9, 2011 Comments off

Cullen Roche knocks another one out of the park.   He goes through the crystal clear logic of how the Fed’s actions are directly responsible for the recent market action.

“A relatively harmless program (QE2 was nothing more than an asset swap with no true transmission mechanism that would alter either the private sector money supply, private sector net financial assets or the real economy) was incorrectly described as “debt monetization“, “money printing“, “stimulus” and other descriptions that implied QE2 was having a massive impact on the real economy through various channels. This couldn’t have been farther from the truth.

What QE2 definitively caused was a massive distortion in investor sentiment due to a general lack of understanding. Equities, commodities and other markets appeared almost entirely invulnerable as long as there was this belief that the Fed was backstopping the market. In other words, the Bernanke Put was in full effect. I have described the negative impact of the Bernanke Put on several occasions (see here and here) over the last year.”  [Bold mine]

The distortion was huge, and Cullen is right on the money with his analysis.  QE II didn’t do anything but change investor sentiment for investing in the inflation trade.

Now that it is clear we are nowhere near hyper-inflation and should fear the return of deflation, this trade is over.  The speculative bid in some asset classes disappeared.  Hence, the market tumbles.

One of the cool things about MMT is that it uses real world stocks and flows as the basis of the theory.   Trading is – in part – about knowing the flows.  MMT hugely helps to identify these flows.

Categories: Main Tags: , ,

Oil and Gas will fall dramatically in price, starting 4 hours ago

June 15, 2011 1 comment

Oil prices are down $4/barrel today

Oil is down $4.00 today.  A settlement below the old lows breaks a huge level of support, and the next stop is $80 or so.

Why did oil get hammered today?  This is an incredible post over at  FT Alphaville.  The oil markets have plenty of supply, and the only thing keeping oil at a high price is the incredible level of speculation we allow in the oil markets.  You’d think for a strategic resource, we’d have a bit more care about making sure the price of oil was low for consumers. But apparently, this is not the case.

But the good news is we are going to see much cheaper oil sometime very soon, perhaps as soon as tomorrow!

Take aways from the post:

  • Saudi Arabia is acting nearly completely independently of OPEC
  • The U.S. considered and is considering opening the Strategic Oil Reserve to cause prices to fall
  • The U.S could be intervening directly in the Brent Crude market with Saudi Arabia

Plus, the only reason the deal fell apart was about the price to be paid for the oil!   I cannot believe they let this incredible opportunity go! Oil could have been at $80 a barrel in a matter of days.  But it does appear that it is going to $80 anyway.

Gas Prices are due for a tumble

If oil falls to $80, then expect gasoline to fall by nearly $.80 per gallon from current levels, which are already $.20 below the highs.  This will restore $120bn of spending power to consumers, or about .8% of GDP.  More on this in a moment.

Oil is very, very heavy today….

Categories: Main Tags: , ,

Oil prices to fall on the recognition of Libyan rebel government

June 13, 2011 1 comment

Oil price fell today, but they could fall even more tomorrow. Germany has recognized the rebels in Libya as being the official government.

The speculative premium in oil is very high right now, and part of this premium is due to the Libyan revolution.

Oil could be at $85 in just a few days.  In a few weeks more, it could be at $70.

Categories: Main Tags: , ,

Saudi Arabia, the only country in OPEC that can pump more oil, says it will pump more oil

June 8, 2011 Comments off

What ever happened to good ole’ common sense? What OPEC says doesn’t matter. What Saudi Arabia says matters, because only Saudi Arabia can meaningfully increase how much oil they pump tomorrow.

Here is the wonderful Oil Drum with an easy to read graph of who has excess capacity.   See that gigantic purple band that dominates the entire graph?  That’s Saudi Arabia!  Just eyeballing it, Saudi Arabia has double the spare capacity of the rest of OPEC combined!

So when the Saudi oil minister says they will pump lots more oil, it basically means OPEC is going to pump more oil.  Not only that, Saudi Arabia has the support of Kuwait and the United Arab Emirates.  I hope we have the support of Iraq, otherwise we spent a few trillion on nothing.

Saudi Arabia is the only one that matters right now, and they have indicated there will be supply.  Mosler says – due to conversations with oil brokers –  Saudi Arabia tells refiners a price, and then tells refiners they will fill every order above that price.

 

 

Categories: Main Tags: , , ,

Saudi Arabia opens the Spigot

June 7, 2011 Comments off

Saudi Oil Production highest since financial crisis

Here is a chart of the amount of oil Saudi Arabia is pumping. It’s a significant increase and makes up for nearly the entire amount Lybia is not producing.  It is the highest amount of oil they have produced since the financial meltdown nearly 3 years ago.

My thinking is that Saudi Arabia will continue to pump this much oil until the price of oil comes down to $70.  The Saudi’s are clearly worried about oil prices being too high.

Much of the inflation worries are due to high oil prices. If we see $3.00 gasoline again, it is totally possible that we will see a big jump in consumer spending.

But keep it coming, Saudi Arabia… we could use it.

Categories: Main Tags: , , ,

High gas prices are shifting 2% of GDP to oil producers, but we still allow massive long only speculation in the energy markets

June 6, 2011 Comments off

There is an easy way to find out how much impact gas prices have on the economy.  The rule of thumb math is that every 1 cent of increase in the price of gasoline exchanges $1bn of consumer spending from goods to energy.   With this in mind, Deutsche Bank estimates we’ve lost between $90 and $150 Billion in demand in the first half including all of May.

But for some reason, they don’t put this into straightforward GDP terms. Choosing a $120bn midpoint of the estimate of losses, and annualizing by the time spent through May, we get 288bn lost on an annualized basis.  The U.S. Economy is about 14.1 trillion.  This is 2% of GDP.

High oil prices are pushing 2% of our entire economy into the energy markets instead of other goods.

Yet, we have huge, huge investment funds buying commodities like crazy and only ever from the long side.  This is a serious mistake that literally costs us vast amounts of long term economic growth.

Categories: Main Tags: ,
%d bloggers like this: