Monday, June 9, 2008

Items to Consider

Regular readers know that I am a huge fan of Louise Yamada. Many remember here from her days as chief technician over at Smith Barney before she subsequently went out on her own. Newsmax carried an interview with her which can be found here. She is without pere in the arena of technical analysis.

One snippet in the interview caught my attention.

'From a technical perspective, she relies on historical trading patterns and calculates a gain of more than 1,000 percent from the 2004 breakout point of $40 a barrel. This provides “an outstanding (and astounding) target of $452.92 per barrel!” she warns. '

Realize she did not grab at this number out of thin air. It is based on historical trading patterns.

The next piece is a excerpt from Jeffrey Brown who is an extremely bright geologist out of Dallas Tx. I have read much of his work including his work on the Export Land Model (ELM) and have had some brief exchange with him. I would strongly encourage all of you to avail yourself of his work as it is must reading. It is not pleasant reading must it is must reading nonetheless!

For the uninitiated the ELM models the effects of the decline in oil exports as a result of the peak in oil production in oil exporting countries while at the same time domestic consumption increases in those same countries. This combination of declining production and increasing domestic consumption leads oil exports to decline at a far faster percentage rate than oil production itself is falling.

321 Energy has a nice interview with Dr. Brown . Here is a little excerpt.

Using straightforward ELM calculations, Jeffrey Brown is confident that Mexico will ship its last barrel of oil to the United States -- or anywhere else, for that matter -- about 6 years from now, in 2014. In a recent interview with Brown, I asked about this forecast.

“Mexico was consuming half of their production at peak in 2004. And if you look at the ’05, ’06, ’07 data, they’re basically on track, on average, to approach zero net oil exports no later than 2014,” he confirmed.

Of course, the U.S. is completely unprepared to replace this source of oil, especially considering the growing stresses on global oil supplies causing by ballooning demand from emerging markets. That means the international competition for available supplies is only going to more desperate in the months and years ahead.

What will this mean to oil prices, according to Brown?

“From this point out I think we’ll see a geometric progression in prices… you know, $50, $100, $200, $400, whatever. The only question now is how short the periods will be between prices doubling again”.

Coincidentally, while working on this report, on April 30, 2008, PEMEX, Mexico’s national oil company, announced it would be unable to fulfill this years scheduled oil export obligations to the United States… falling short by about 11% or 184,000 barrels a day.

I provide this for those that need fundamentals alongside technicals to trade. Not enough you say. Try this comparison on for size.

Rice & Oil: a Useful Comparable

For a useful way to think about energy exports and prices, Jeff Brown points to the current situation with global rice supplies.

As long as there are abundant local supplies, countries are happy, eager in fact, to export excess production in order to generate foreign exchange. But as soon as local consumption exceeds locally available production, then all hell breaks loose and the next thing you know countries are banning exports, a move that has already been undertaken by Vietnam and a number of other countries.

In that scenario, price eventually no longer becomes a factor in the availability of the commodity. Vietnam, for example, is not going to let its people starve just because higher global prices would allow it to earn an extra $10 a bag of rice.

And so in the face of the prospect of any serious shortage of an important resource – energy being maybe the most important – export markets freeze up and the price begins to be set at the margin, literally based on a global competition for the dwindling supplies that manage to leak out around the edges.
“People are crazy not to be focusing on the oil export situation,” Dr. Brown told me.

But who are I trying to kid. According to Dennis Kneale and the rest of the NASA bound rocket scientist hosts over on pompom TV, energy is in a speculative bubble that can be easily cured via margin requirements and the Fed! Believe me, no one wishes that were so more than me. I am no rooting for this in any way but the delusional lack of critical thinking on the issue only delays any remedies to the situation. Time becomes the enemy here McFly !

Good speculating to you all.

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