By Gary Dorsch, Editor, Global Money Trends
For the vast majority of Americans who usually don’t follow trends in the crude oil futures market, the Global “Oil Shock” only caught their attention after gasoline prices suddenly jumped 25 cents a gallon at the pump this month, and about 80 cents more than a year ago. Last week, West Texas Sweet crude oil surged to an all-time high of $98.62 /barrel, and jolted the Dow Jones Industrials 4% lower towards the 13,000 level, zapping the value of investors’ 401k accounts.
Guy Caruso, the head of the US Energy Information Administration, told reporters on Nov 12th, “We haven’t seen the full pass-through of high oil prices yet. I would say what's in the pipe right now for gasoline is about another 20 cents.”
The stunning rise in the price of crude oil, up 56% this year and up 365% in a decade, to within a whisker of the magical $100 /barrel level, has some traders wondering whether “Peak Oil” is finally here. If correct, is the spectacular bull-run for global stock markets, which is now 4.5-years old, building a major “rounding top” pattern? Until recently, high and rising oil prices didn’t disturb the bullish psychology among global stock market operators. Instead, the spin surrounding rising oil prices described a positive story, an unprecedented boom in the world economy.
But historically, Global “Oil Shocks” have tipped the global economy into recession. For example, the Arab oil embargo of 1973-74 and the Iranian Revolution of 1978-79 triggered unprecedented increases in oil prices and were associated with worldwide recessions. Depending on how the adjustment is calculated, $38 a barrel for crude oil in the 1970’s would be worth around $96 to $103 /barrel today. Most
“Peak Oil” refers to the inevitability of a peak in global oil production. Oil is a finite, non-renewable resource, and once half of the original reserves are depleted, oil production is likely to stop growing and then begin a terminal decline. In 1956, a
OPEC sits on about 75% of the world’s total proven oil reserves of 1.21 trillion barrels, according to British Petroleum’s annual Review of World Energy. “Global reserves are more than sufficient to meet current production levels for more than 40-years, although accessing the oil is getting tougher due to high exploration and production costs, and reserves are also falling under more state control,” BP said.
Some of the biggest proven oil reserves lie in
Earlier this year,
Earlier this year,
The OPEC oil cartel, which accounts for 40% of the world’s production, is gaining enormous power and wealth. OPEC provides almost half of total
Of the 65 largest oil producing countries in the world, 54 are past their “Peak Oil” production and are now in decline, including the USA, down 11% since 1971, and the UK’s North Sea oil reserves are down 27% since peaking in 1999. Other big oil producers (more than 500,000 bpd) that are in decline include Australia, down 26% since 2001, and Norway, down 13% since 2001. The Cantarell oil field, Mexico’s largest has also peaked with its output falling to 1.7 million bpd in 2007, down from its peak output of 2.1 million bpd.
But on Nov 12th, Saudi Arabia's oil minister Ali al-Naimi said “there will be absolutely no discussion of a production increase by heads of state or their oil ministers on short-term supply” in Riyadh next week. Naimi said that OPEC had nothing to do with the Global “Oil Shock” but is watching the market "very carefully" and did not rule out the possibility of an increase in production at OPEC’s December meeting.
“I cannot answer why the prices are so high. Prices are influenced by many factors. The demand is not there, and inventory levels are within the 5-year average and in a comfortable place. These pessimists about the adequacy of supply and adequacy of reserves in the future, I think they are doing a lot of damage to the stability on the market,” he said, referring to “Peak Oil” theorists.
“We are of course concerned about high oil prices,” said OPEC chief Mohammed bin Dhaen Al Hamli on Oct 30th. But the market is increasingly driven by forces beyond OPEC’s control. It’s driven by geopolitical events and the growing influence of financial investors,” said Hamli, who is also UAE oil minister. “We have to stay alert. If the market needs more oil, we will supply it,” he added.
Global Oil Demand driven by China and India
India and China are two Asian giants that consume only a third as much oil as the US today, but by 2030 India and China together will import as much oil as the US and Japan do today. If the Chinese and Indians consumed as much oil per capita as Americans do, the world’s oil demand would be closer to 200 million bpd, instead of 85 million barrels today. And with the world running on a limited cushion of Saudi spare capacity, any interruption in supplies from
Global “Oil Shock” Rattles
When Chinese central bankers speak to the media, their comments are usually brief, and subject to mis-interpretation. On October 16th, Chinese central bank governor Zhou Xiaochuan might have signaled a significant shift in monetary policy, indicating a willingness to deflate the Shanghai red-chip bubble, in order to contain inflation pressures in the economy, that threaten the social order of the country.
“Asset prices are not the primary consideration for the bank when it comes to setting monetary policy,” Zhou said. Instead, “combating consumer inflation and increases in global commodity prices are the main reasons why
The Global “Oil Shock” lifted prices above the psychological 700-yuan /barrel, and coupled with Beijing’s latest monetary tightening, sparked a selling spree in the mighty Shanghai red-chip market to as low as 5,032, off 15% from its all-time high set in mid-October. The People’s Bank of China (PBoC) lifted the proportion of deposits that commercial banks must keep in reserve by a half-point to 13.5% for big banks on Nov 10th, to the highest level in nearly two decades.
The latest tightening move is expected to drain 190 billion yuan ($25.6 billion) from the
Global “Oil Shock,” Stronger Yen, Rattles
“We need to be aware that stock price falls and the yen’s rise, if sustained, could have a negative effect on Japan’s economic outlook,” Iwata said in a speech to business leaders in Shimonoseki, Japan. One week later, crude oil rose above the psychological 10,000-yen level for the first time in history, and the dollar topped out at 117-yen, before tumbling to as low as 109.50-yen today, triggering heavy sales of Japanese exporter shares that dominate the Nikkei-225.
With the dollar reeling to as low as 109-yen, a key technical support level, and wrecking havoc on the Nikkei-225, Japan’s MoF stepped up the “jawboning” and threatened outright intervention in the forex market to support the dollar. Japanese Finance Minister Fukushiro Nukaga said on Nov 12th, he is carefully watching developments in both the currency and stock markets, and will respond carefully to avoid sharp fluctuations in the foreign exchange market.
“The yen is appreciating too fast and speculators need to be careful to avoid the possibility of intervention,” Japanese Prime Minister Yasuo Fukuda warned. “In the short term, yen appreciation would certainly be a problem. Any kind of sudden change in exchange rates would not be desirable. Speculative movements need to be held in check.” Asked if
Bernanke Fed is key Driver behind historic Oil Rally
The US dollar’s slide to yet another record low against the Euro last week, helped maintain the allure of crude oil for speculators who bid “black gold” higher by 40% since mid-August. Oil futures, like gold, offer a hedge against a weaker dollar. Oil prices have soared in the wake of rate cuts by the Bernanke Fed which weakened the dollar, and fed funds futures contracts predict another rate cut next month.
OPEC is likely to discuss creating a basket of currencies for oil pricing at its next summit due to the steady decline in the dollar,
Speculators are placing record bets against the US dollar on ideas the Federal Reserve will continue to lower interest rates, while other central banks hold their rates steady, or tighten their rates further. Net short positions against the dollar in the
But testifying before the House of Representatives on Nov 7th, Fed governor Frederic Mishkin said the central bank probably won’t take any action to combat the inflationary effects of high oil prices. “It is always important, not to overreact to a rise in oil prices, but actually to think about what is going to happen in the longer run context, and take exactly the steps that will create an environment on which is successful both on the inflation front and on the output front,” he said.
If a decision is made by the Bush administration to carry out a lightning strike against
However, the “war of words” between the Bush clan and Tehran’s mullahs over Iran’s nuclear program dates back to the US conquest of Iraq’s oilfields in March 2003, and to most global stock market operators, the rhetoric sounds more like the “Boy who Cried Wolf.” But if war does come to the
The Israeli Air Force does not have the capacity to sustain continuous and prolonged attacks against
It’s difficult to quantify the “Iranian “war premium” that has been built into crude oil prices. Speculators in on-line betting parlors, rate the odds of a
“The strategy for now is one of sanctions, of a united front of nations in that context, and the strategy of declaring without any doubt that all options are on the table. I think like others that the option of using military force is the last resort. But it’s clear that the opportunity for a negotiated solution is diminishing if the diplomatic path should not succeed to stop the Iranian nuclear program” Mofaz added.
But in an attempt to deflate some of the Iranian “war premium” that has help lift US crude oil prices to within a whisker of $100 /barrel, and knocked the Dow Jones Industrials below the 13,000 level, Mr Bush started to tone down his tough talk of “World War III” over Iran’s nuclear weapons program on Nov 10th, after he secured a pledge from German Chancellor Angela Merkel that Bonn would be willing to support a third round of UN sanctions against Iran.
Merkel, in a visit to Bush’s ranch in Crawford, Texas she would also consider cuts in Germany’s robust trade with Iran, in exchange for Mr Bush’s agreement that diplomacy is the best way to resolve the standoff with Iran.
“The threat posed through the nuclear program of
However, there are recent indications that German engineering giant Siemens, has decided to pull out of all new business dealings with Iran, and Germany’s three biggest banks, Deutsche Bank, Commerzbank, and Dresdner, have quit Iran after a stern warning from US vice-president Dick Cheney that they would encounter strong barriers to doing business in the US, if they continue to do business with Tehran. European banks store
Global Markets in Un-chartered Territory
Whether the historic rise in crude oil towards $100 /barrel heralds the arrival of “Peak Oil,” or is just a speculative bubble that will deflate, are just some of the tough questions in today’s brave new world of investing.
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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.
He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.
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