Gasoline price are ahead lower?

by Kimble Charting Solutions

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An Elliott Wave Technical Analysis of Gasoline (Guest Post)

By Ramki Ramakrishnan

Most traders in the commodity and energy markets watch technical levels very closely. Some say that prices follow technicals because traders watch the technical levels. Others (especially those who practice Elliott Wave Analysis) would say that when the herd mentality rules the market, certain types of movements can be anticipated, not because traders watch those levels, but because the underlying emotions of greed and fear tend to exert their influence on the markets.

Take the case of Gasoline.

A five wave rally has been completed at $348, and hence we should lookout for a good sized correction. But a careful analysis of the internal waves of the rally to 348 shows an extended fifth wave. Time and time again, whenever a rally finishes with an extended fifth wave, we will get a fairly quick sell off. The first target for the sell off is usually the prior fourth wave of one lesser degree. In the case of Gasoline, this level comes at 277.30. We have already come off by over 15% from the top, and it looks like we can get another 7%.

Typically, when prices break below the immediately preceding low, we will hear from some market participants that they are now more bearish. However, using Elliott Wave Analysis, one can say with a reasonable degree of confidence that Gasoline will probably experience one more rally that will take it back to at least the 316 level, more likely to the 323 levels.

Should such a rally materialize as I am anticipating, these same traders who became bearish at the lows will turn bullish. Alas, that will be a trap for many because the completion of five waves in the larger rally that finished at 348 would require a much deeper correction, perhaps down to the 250 levels. So Elliott Wave Analysts would then call Gasoline down from near 323.

What can go wrong with this analysis?

Well, just about everything! But what the wave analyst is offering is an evaluation of probabilities. From past experience, the turns that I am anticipating are highly probable, but not guaranteed. So how can one use this information? The best way to take advantage of Elliott wave analysis is to know where the risk lies, and choosing low-risk levels to position in the direction that wave analysis points you to.

For example, I think we will have some good resistance near the $305 levels. Any recovery that fails there will be a cue to go short . Again, as we approach the immediately preceding low around 284, we should lighten up on shorts and wait to see what happens between there and 277.30. If it gets choppy down there, it is not an indication of continuation of sell off, rather the preparation for a bounce that will cause a lot of blood to flow on the trading floors. We will review the chart of Gasoline again as we approach the key levels.

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F for Fail

by Menzie Chinn

JEC Republican analysis of the impact of monetary policy on gasoline prices

I’ve been grading papers for the past half week, so when this popped into my mailbox this morning, I was in a “grading” mood. And when I finished reading it, I determined I would give it an F. From “The Price of Oil and the Value of the Dollar: Declining Value of the U.S. Dollar Adds to the Price of Oil and Gasoline,” Republican Staff Commentary (May 16, 2011):

Arguably, there are other factors affecting the price of gasoline than just the price of oil. However, the retail price of gasoline in the United States moves in tandem with the price of oil. In fact, the correlation between the two is greater than 98%. Given that oil is the primary input to gasoline and the close correlation we can perform a similar analysis to determine how much of the current price of gasoline is attributable to the declining value of the dollar.

The final chart shows what the price of gasoline would be if the value of the dollar had not declined. In other words, the dollar’s decline accounts for 56.5 cents of the $3.963 current price of gasoline. [emphasis added in bold - mdc]

Clearly, the objective of the study is to argue that QEI and QEII raised oil prices, I think by arguing that they caused inflation. Well, this may very well be the case, but here I’m just going to critique the analytics of the memo.

The JEC-Republican Staff Commentary Analysis

The core of the analysis is summarized by this graph from the Commentary:

Figure from “The Price of Oil and the Value of the Dollar: Declining Value of the U.S. Dollar Adds to the Price of Oil and Gasoline,” Republican Staff Commentary (May 16, 2011)

What the authors have (apparently) done is to plot the price of Brent Crude, and then plot Brent assuming the Fed’s trade weighted dollar index (broad) had stayed constant at 2008M11, levels. The gap is $17.04, which they then convert to $0.565 gap per gallon of gasoline (by the way, the implicit conversion factor is slightly different from the 0.25 cents per gallon for a $10/barrel.

Math and Regression Estimates

This is an interesting procedure. It is so interesting, I don’t know why one would ever do it. I can certainly replicate it; since the dollar broad index is roughly 14.8% weaker in 2011M04 than 2008M11, then one can divide the actual Brent price by 1.148 to obtain a $15.85 dollar figure for 2011M04, close enough to the $17.04 cited by JEC-Republicans.

The analysis presupposes the relationship between oil and dollar were at equilibrium in 2008M11. More importantly, it presupposes a unit relationship between the two. The graph seems to suggest the existence of a unit coefficient, but regression analysis does not uncover such a relationship. Over the sample period shown in the JEC-Republican graph (2008M01-2011M04), ∂P_oil/∂DOLLAR = 1.32 if the constant is suppressed (R² = 0.27), and negative 7.92 if the constant is allowed (adj-R² = 0.87).

Interestingly, the coefficients I obtain for the 2008M11-2011M04 period are remarkably dissimilar to those for the period conforming to monetary policy easing, starting in 2007M07 (when the Fed started dropping the Fed funds rate). Then, the regression coefficient (no constant) is 0.16. If one thought monetary easing was the culprit, this would be the right time to start the analysis, not with QE I. Re-doing their calculation, based on 2007M07, one finds the implied difference is only $8.85.

Figure 1: Current dollar price of Brent Crude (blue), and Brent indexed to 2007M07 value of inverted Fed trade weighted value of dollar index (red). Source: IMF, International Financial Statistics, St. Louis Fed FREDII, and author’s calculations.

Of course, one has to wonder if one can trust the correlation coefficients as representative of the underlying population parameters (technically, do the point estimates converge to the population moments?). I find that the series are integrated of order one, but the two series are only possibly cointegrated using asymptotic critical values, and a 5% significance level, over the sample period investigated by the JEC-Republicans. That relationship disappears if the sample is extended to 2007M07-11M04. (In log terms, Brent appears to be stationary, but the nominal dollar appears stationary, over the 2008M11-2011M04 period; and both appear to be integrated of order one for the longer period).

How about Some Economics?

When I teach econometrics, one of the things my students get sick of hearing is “correlation is not causation”. Nonetheless, I think it’s a warning that should be heeded in all sorts of instances — including this one. From the “commentary”:

Analysts and pundits often cite, correctly or incorrectly, the turmoil in the Middle East, a strengthening global economy, or speculation as the causes for the run up in crude oil prices. What is rarely discussed as an important factor in the rise of the dollar price of oil is the role played by the dollar itself. Oil is an international commodity that trades in dollars. The value of the unit of exchange, in this case the dollar, plays an important role in determining the “headline” price for the underlying commodity.

The authors of the commentary then rush headlong into modeling the oil price as a function of the nominal exchange rate, holding all else constant. As I noted in this post, such an approach is untenable.

while there is a negative relationship between the dollar’s value and the price of oil (in logs), that relationship is not statistically significant after accounting for serial correlation; nor is it significant in first differences.

Second, the idea that it’s just a numeraire issue — weak dollar implies more dollars per barrel of oil — does not seem to be consistent with a negative correlation between the real price of oil and the real value of the dollar, plotted in Figure 3.

In point of fact, one should expect two-way causality. A higher relative price of oil should weaken a country’s real exchange rate if it worsens the country’s terms of trade (i.e., the country is a net importer of oil). In addition, if the change in the relative price induces obsolescence of some of the capital stock, this would induce an economic contraction that might depreciate or appreciate the currency, depending on variety of assumptions (home bias in consumption, capital/labor ratios in the nontradable versus tradable sector, complementarity of capital and labor with energy, etc.). In Chinn and Johnston (1996) [pdf], a 10 percentage point rise in the real price of oil induces a 2 percentage real depreciation in a typical OECD country real exchange rate. That estimate relies upon exogeneity of real oil prices (an assumption not invalidated by the data).

Close readers will see that my discussion of how to apportion how much of the dollar decline is causing — versus being caused by — oil price increases is related to the issue of how to identify oil price shocks. There are numerous ways of accomplishing this goal. For one instance, see the IMF’s April 2006 World Economic Outlook Chapter 2, which uses a particular VAR to identify the shocks (thanks to Alessandro Rebucci for reminding me about this study). In that case, there is essentially zero effect of the oil shock on the real value of the U.S. dollar.

See also Jim’s 2008 post on the dollar/oil correlation.

Exploiting Other Correlations

Consider another correlation – between rest-of-world GDP and Brent. Figure 2 illustrates the strength of the relationship over the 2001Q1-2010Q4 period.

Figure 2: Log current dollar price of Brent Crude (blue), and log rest-of-world real GDP (purple). Source: IMF, International Financial Statistics, Federal Reserve Board, and author’s calculations.

Running a regression of log Brent on log RoW GDP (and current and lagged first differences) over the 2001Q1-08Q3 period yields a specification that explains a large proportion of variation in Brent. The Adj.-R² = 0.96 (!!). (It’s 0.91 over the entire 2001Q1-2010Q4 period). In fact, this relationship rejects the no-cointegration null hypothesis at all conventional levels, unlike the exchange rate-oil price relation exploited by JEC-Republicans.

One can then ask how much lower oil prices would’ve been if RoW GDP had held constant at 2008Q4 levels: $10.78. A conclusion consistent with this view is that we could have had lower oil prices if only the RoW had stopped growing.

I don’t literally believe this result (nor the implied conclusion). What this exercise shows is that there are many plausible drivers of oil prices. Trying to tease out the impact of monetary policy on oil prices is a laudable goal, but trying to do it by assuming exchange rates have zero covariance with the fundamental determinants of real oil prices is a mistake.

What Would Be Better

Despite the previous assessment, I wouldn’t say the JEC-Republicans necessarily wrong in their estimate. Merely that if they are right, it would be by accident. In fact, one could come up with numbers that are bigger.

It’s incumbent upon the critic to propose alternatives. Before doing that, it might be useful to think of what could drive up oil prices denominated in US dollars:

• US GDP
  
• Rest-of-world GDP
  
• Energy intensity of economic activity
  
• Oil production capacity
  
• Cost of production of marginal producer
  
• Nominal interest rates
  
• Inflation rates
  
• Expected price of oil (itself a function of trends in the above factors)
  
• Speculative activities of non-fundamentalist traders
  
• Numeraire issues

The JEC-Republican study essentially focuses on the last point, assumes changes in the dollar’s value against other currencies has no other impacts on the underlying price of oil. For instance, this approach is consistent with dollar depreciation that induces no re-allocation of aggregate demand across borders, or alternatively, the oil intensity of the US and the rest-of-the-world is the same.

The above list of potential determinants suggests that one needs more than a bivariate approach, and a multivariate (multiple equation) approach is required: either a structural multi-equation model, a VAR or SVAR. From Alquist, Kilian and Vigfusson, “Forecasting the price of oil,” forthcoming Handbook of Economic Forecasting, edited by Graham Elliott and Allan Timmermann:

There are several reasons to expect the dollar-denominated nominal price of oil to
respond to changes in nominal U.S. macroeconomic aggregates. One channel of transmission is
purely monetary and operates through U.S. inflation. For example, Gillman and Nakov (2009)
stress that changes in the nominal price of oil must occur in equilibrium just to offset persistent
shifts in U.S. inflation, given that the price of oil is denominated in dollars. Indeed, the Granger
causality tests in Table 1a indicate highly significant lagged feedback from U.S. headline CPI
inflation to the percent change in the nominal WTI price of oil for the full sample, consistent
with the findings in Gillman and Nakov (2009). The evidence for the other oil price series is
somewhat weaker with the exception of the refiners’ acquisition cost for imported crude oil, but
that result may simply reflect a loss of power when the sample size is shortened.


Gillman and Nakov view changes in inflation in the post-1973 period as rooted in
persistent changes in the growth rate of money. Thus, an alternative approach of testing the
hypothesis of Gillman and Nakov (2009) is to focus on Granger causality from monetary
aggregates to the nominal price of oil. Given the general instability in the link from changes in
monetary aggregates to inflation, one would not necessarily expect changes in monetary
aggregates to have much predictive power for the price of oil, except perhaps in the 1970s (see
Barsky and Kilian 2002).

…there is considerable lagged feedback from narrow measures of money such as M1 for the refiners’ acquisition cost and the WTI price
of oil based on the 1975.2-2009.12 evaluation period. The much weaker evidence for the full
WTI series may reflect the stronger effect of regulatory policies on the WTI price during the
early 1970s. The evidence for broader monetary aggregates such as M2 having predictive power
for the nominal price of oil is much weaker, with only one test statistically significant.

A third approach to testing for a role for U.S. monetary conditions relies on the fact that
rising dollar-denominated non-oil commodity prices are thought to presage rising U.S. inflation.
To the extent that oil price adjustments are more sluggish than adjustments in other industrial
commodity prices, one would expect changes in nominal Commodity Research Bureau (CRB)
spot prices to Granger cause changes in the nominal price of oil. Indeed, Table 1a indicates
highly statistically significant lagged feedback from CRB sub-indices for industrial raw materials
and for metals.

In contrast, neither short-term interest rates nor trade-weighted exchange rates have
significant predictive power for the nominal price of oil. According to the Hotelling model, one
would expect the nominal price of oil to grow at the nominal rate of interest, providing yet
another link from U.S. macroeconomic aggregates to the nominal price of oil. Table 1a,
however, shows no evidence of statistically significant feedback from the 3-month T-Bill rate to
the price of oil. This finding is not surprising as the price of oil clearly was not growing at the
rate of interest even approximately (see Figure 1). Nor is there evidence of significant feedback
from lagged changes in the trade-weighted nominal U.S. exchange rate. This does not mean that
all bilateral exchange rates lack predictive power. In related work, Chen, Rossi and Rogoff
(2010) show that the floating exchange rates of small commodity exporters (including Australia,
Canada, New Zealand, South Africa and Chile) with respect to the dollar have remarkably robust
forecasting power for global prices of their commodity exports. The explanation is that these
exchange rates are forward looking and embody information about future movements in
commodity export markets that cannot easily be captured by other means.

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Gas Prices Closing in on 2008 Highs

by Bespoke Investment Group

ln the summer of 2008, the price of oil ticked close to $150/barrel, and at the same time the national average price for a gallon of regular gasoline ticked to $4.05. Gas prices didn't stay above $4 for long, however, and within a month of the $4.05 peak, the price had dropped by 35 cents. Within three months, in the midst of the financial crisis, the price per gallon had fallen to $2.80.

As shown below, the price of gas is now much closer to its 2008 high than the price of oil. In fact, the national average for a gallon of regular is currently at $3.90, or just 3.8% away from $4.05. Oil, on the other hand, is still 28% from its all-time high reached in 2008. Consumers can only hope that prices don't stay near or above $4/gallon for long. Unfortunately, a big decline in gas prices would likely coincide with a slowdown in the economy and a drop in equities. 

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Department of Energy (DOE) Energy Inventories

by Bespoke Investment Group

This morning's release of the weekly energy inventory report from the Department of Energy (DOE) showed that crude oil stockpiles increased by 6.2 mln barrels. This represents the largest weekly increase since July 2010. As shown in the chart below, this week's increase in oil stockpiles widened the gap between current and average levels even further. Not surprisingly, oil saw a knee jerk decline, but given the way this commodity has been trading don't be surprised to see it rebound as the day goes on.

While crude oil stockpiles continue to build, inventories of gasoline have seen a rapid decline. If you are wondering why gasoline prices are near record highs, even though oil remains well below its 2008 peak, look no further than the chart below. After starting off the year at above average levels, gasoline inventories are now below average for the first time this year.

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Charting the Course to $7 Gas

By: MISES

J. Kevin Meaders writes: Let's go back to the beginning of the current economic crisis — yes, it is still a crisis for many millions of Americans who lost their jobs, ruined their credit, filed for bankruptcy, lost their homes, and lost their lifestyle. Shanty towns have popped up all over America, though rarely gaining media exposure.

Tens of millions have been ripped from the middle class back down into the poverty from whence their parents or grandparents had climbed.

Make no mistake: it is not capitalism that got us here; it is government interventionism and central banking — the Federal Reserve.

The first two charts we're looking at are the S&P 500 Index (top) and the Effective Federal Funds Rate (bottom). Our current economic state of affairs began with the Internet bubble (the red arrow on the first chart), which itself was exasperated by an earlier easing of the federal-funds rate (the green arrow on the second chart).

After the bubble burst in 2000, Alan Greenspan sought to prop up the "irrational exuberance," against which he himself had cautioned, by dropping interest rates — artificially, of course — from 6.5 percent down to barely 1 percent in 2002 (the orange arrow on the second chart).

The whole idea here was to encourage corporate (and private) spending by lowering the cost of borrowing money. This "cost" was thus much lower than it otherwise would have been in a truly free market, where interest rates are set by the supply and demand of money. Today, a free-market interest-rate environment is simply a dream — it's illusory; it doesn't exist. The Fed, rather, simply creates as much supply as it wants, and then hopes foolish risk takers will take the bait. Indeed, millions did.

Enter the housing boom. Maybe you remember the 1 percent LIBOR interest-only adjustable loans? How completely, unrealistically optimistic (or gullible) did you have to be in order to buy into an adjustable-rate mortgage (ARM) when interest rates were at an all-time low?

In any event, the loose-money policy and low interest rates drove the real-estate market to new, all-time highs, with record low unemployment and a false feeling of risk-free risk taking.

Sure enough, inflation hit, the Fed raised rates, those ARMs adjusted upward, people couldn't sell their house for what they owed, and then record foreclosures ensued. All the while, the banks responsible for the bad loans got bailed out by the taxpayer, and the bank executives got to keep their multimillion-dollar bonuses. Hooray.

But that's not the end of it. Once the housing bubble burst, our masters at the Fed (primarily Comrade Bernanke) decided to drop rates to zero and to inflate the money supply beyond all recognition.

The next chart is the Fed's monetary base. Note the vertical movement during and after the Depression of 2008: an increase from around $800 billion to just over $2.4 trillion.

This is the most worrisome chart I have ever seen. By comparison to what Bernanke has done, take a look at the blip (circled in red) that Greenspan caused just after the dot-com bust in early 2000. This is not the kind of comparison that makes it to CNBC or the front page of the Wall Street Journal.

If 1 percent interest rates and that small Greenspan monetary increase back in 2000 caused the boom and ultimate crash of 2008, then what will be the ultimate result of our current extended course of 0 percent interest rates and a 300 percent increase in the monetary base?

There is an answer, but it's not good. To quote Human Action, by Professor Mises, the economist who actually predicted our current plight over 60 years ago,

There is no means of avoiding the final collapse of a boom brought about by credit [or monetary] expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of the further credit expansion, or later as a final and total catastrophe of the currency system involved.

The end result seems fixed; the only question that remains is what happens between now and then.

Even though the federal-funds rate has been at zero, and even though the Fed has created enormous amounts of fiat money, most of that money remains at the banks. Take a look at the chart below.

This chart represents the amount of money our nation's banks keep on deposit with the Federal Reserve. So you see, the newly created money is being held by the banks, who instead of loaning it out to folks who would like to refinance their houses and businesses who might expand and hire (which is what the Fed intended), they (the banks) just redeposit the free money back with the Fed, and earn massive amounts of interest.

What? Are you kidding me? The banks got bailed out from billions of dollars in bad loans that they issued, then they got literally $1.2 trillion (as you can see from the chart above) of free money that they then turned around and invested in Treasuries, the interest on which is one of Obama's biggest line-item budget expenses. Are we living in an Ayn Rand novel? How would you like to get free money to invest, the interest on which is guaranteed by the government's taxation authority (and guns)?

And speaking of the budget, the next chart is the second scariest I've ever seen. It shows the federal deficit, which now surpasses $1.4 trillion annually! Note that the chart is denominated in millions.

Unless Congress cuts spending dramatically (which I doubt will happen), the Fed will continue to buy Treasuries to fund our deficit with money that is created out of nothing, just like the Weimar Republic did after World War I. The end result must be a collapse.

Not to throw more fear on the fire, but recently the "Godfather of Bonds," Bill Gross, who manages over $1 trillion, sold every single Treasury his firm owned because, according to a shareholder letter he recently published,

Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies — inflation, currency devaluation and low to negative real interest rates.

I would venture to say it has already begun.

"So what can we do about it? And how does this affect me and my money?" Did I just hear you ask that? Well, good question. Since I don't have the space or the time to go into detail here, suffice it to say that booms and busts are easy to understand and predict if you reject the currently prevalent Keynesian School of economics and look to the Austrian School.

Most people have heard of the "wheelbarrow inflation" of the Weimar Republic in Germany. History has been down this very same road many, many times, and the result is always the same.

Thus, we can learn from the Austrian economists' reasoning — which reflects realism and historical facts, and not flights of academic fancy. Though I run the risk of dramatically oversimplifying the investment method, essentially you want to be more aggressive in a monetary expansion phase and more conservative in a monetary contraction phase. It sounds easy, huh? In reality, it is impossible to time the market to the day or even the month, but our experience in 2000 and 2008 has shown that it is possible to be correct to within a 12- to 18-month period. The key is knowing what signs inevitably show themselves — and taking heed.

As a prime example, one of the chief indicators we monitor in addition to those above is the velocity of money. This can vaguely be analogized to how quickly a dollar moves from one hand to another, but it is much more than that.

Every time you deposit a dollar into your checking or savings account, your bank can then lend that dollar out to ten other people, essentially creating ten more dollars out of your one dollar deposit. This is called the Mandrake mechanism, and it is part of the problem of expanding credit, because your dollar is leveraged ten to one. This exponential expansion of money in the banking system creates vast profits for the banks, but also vast losses when a run ensues (the true reason the Federal Reserve System was created was to bail out the banks).

So here's a recap:

1. The Fed has tripled the money supply and reduced interest rates to zero.
2. A stronger economy is trying to get off the ground but can't because all the newly created money is being retained by the banks in reserve.
3. Eventually the banks will start lending again and the velocity of money will increase.
4. When that occurs, inflation will begin to show signs that even Bernanke can't ignore, and he will respond by raising rates.
5. Eventually, increased velocity, inflation, high oil prices, and interest rates will conspire to crash the market again. And we start the whole thing over again — if we can.

With the tripling of the money supply, cold mathematics would imply that eventually prices would likewise triple — once the new money has made it out into the economy. Thus, $3.50 gas becomes $10.50 gas. Clearly the math is not as easy as that, because really no one (especially Bernanke) can predict what will happen; but if history is any guide, then all of a sudden, $7 gas seems like a deal.

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How Gasoline Price Hikes Affect Buying Choices

By Justin Lahart

A dollar is a dollar. So if rising prices cut into our purchasing power, textbook economics suggests that we’d carefully weigh all our buying decisions to determine where to cut back, and by how much.

Of course that’s not really the way most people budget. Rather, we put different items in different budget baskets – here’s one for movies, here’s one for clothing, here’s one for gassing up the car. So if clothing prices go up, we’ll cut back on clothing purchases first before cutting back on other things. But even though anecdotal and laboratory evidence suggests this is how we operate, economists have had little success finding evidence of how this works in the real world. Until now.

Economists Justine Hastings at Brown University and Jesse Shapiro at the University of Chicago’s Booth School of Business got data on purchases of gasoline from a large grocery chain covering January 2006 through March 2009. As gasoline prices rose sharply in late 2007 through the summer of 2008, fewer and fewer people opted to buy higher octane midgrade and premium gasoline for their cars, and bought less expensive regular instead. (When prices fell in late 2008, the trend reversed, in spite of the worsening economic climate.)

But what about other purchases? Because some customers held retailer loyalty cards with the grocery store, Hastings and Shapiro were able to track them, too.

Specifically, they looked at purchases of half-gallon cartons of orange juice. The grocery chain carried five brands – four national ones and its own private label. They found that while rising gasoline prices led more people to buy regular, they didn’t prompt people to buy less expensive orange juice brands in an attempt to make back the money they were losing at the pump. “If anything, the direction of our estimates suggests that higher gasoline prices tend to increase the demand for higher-quality orange juice brands,” they write.

An aside: The economists also point out that “Consumer Reports” and others have disputed the wisdom of buying anything but regular for anything but a sports car. With regular averaging $3.86 a gallon in the U.S., versus $4.00 for midgrade and $4.13 for premium, it’s a bit of a mystery why many people would pay up for the questionable benefits of a higher octane grade. But the latest data from the Energy Information Administration suggests that’s what 13% of us still do.

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Crude Oil Price Surge and Supply, There Are No Good Outcomes

By: James_Quinn

The political class and their mouthpieces in the corporate controlled mainstream media are desperately trying to spin the oil price surge as a temporary inconvenience that will not derail their phony recovery story. Brent crude closed at $116 per barrel yesterday. West Texas crude closed at $104 per barrel. Unleaded gas has risen by 22% in the last month and 60% since September 1, 2010. I’m sure this slight increase hasn’t impacted Ben Bernanke or Lloyd Blankfein. Their limo drivers just charge it to their unlimited expense accounts. Joe Sixpack, driving his 15 mpg Dodge RAM pickup, is now forking over an extra $1,200 per year in gas expenditures, not to mention more for everything impacted by oil such as food, utilities, and anything transported to their local Wal-Mart by truck (everything). Luckily, the Federal Reserve and crooked politicians only care about their comrades in the top 1% elitist society, for whom oil is an investment, not an expense.

The “experts” speak as if they know what will happen, even though they never saw the rebellions coming in Tunisia, Egypt or Libya. They assure the masses that Libya doesn’t really have an impact on U.S. oil supply. It’s as if these shills never took Econ 101 in college. World oil demand is 88 million barrels per day. Oil supply is 88 million barrels per day. If 1 million barrels of oil supply are taken off-line, it doesn’t matter that the U.S. doesn’t get their oil from Libya. The Italians need their oil. Do the talking heads understand that oil is fungible? The supplier will ship the oil to the highest bidder. Presto!!! – $116 a barrel oil.

With Friends Like This, Who Needs Enemies

Let’s assess the probability of things getting better in the near, medium, long term or ever term. Take a gander at the chart below. These countries account for 29% of the daily world oil supply. Does it strike you as a list of stable countries with happy populations of employed young men?  Egypt, Libya, Yemen, Syria and Iran have already experienced revolution or are on the verge of revolution. Algeria is dead man walking. The Saudi royal family is trying to buy off the masses to stay in power. The revolution genie is out of the bottle. It can’t be put back. Mix 40% unemployment, with millions of young men, no hope, and some Muslim fundamentalism and you’ve got yourself an out of control situation. No amount of public relations spin will create a positive outcome for the United States. The existing world order of despots, kings, and military juntas was just fine for Washington DC. They poured hundreds of billions of “aid”, tanks, helicopters and missiles to these “freedom fighter” despots who diverted the billions to their Swiss bank accounts and fell into line with U.S. policy. No matter who takes power when these revolutions succeed in toppling our puppets, the new regimes will not be friendlier toward America. And they still have the oil.

One look at the chart of self reported world oil reserves paints a picture of woe for the United States. Countries in the tinderbox of the Middle East and Africa control 65% of the world’s oil reserves. Saudi Arabia controls 20%, Iran and Iraq control 11% each, Venezuela controls 7%, Russia 5%, and Libya 3%. So, countries that can barely stomach our existence, hate us, or just despise us, control 57% of the world’s remaining oil. Sounds like a recipe for lower oil prices in the future. The two countries on our border are the only dependable suppliers for the U.S. Canada controls 13% of the world oil reserves, mostly in its tar sands. Mexico controls just over 1% of the world’s oil reserves, but supplies 13% of the U.S. daily oil supply.

Drill, Baby, Drill

Now for a reality check on the “Drill Baby Drill” propagandists like Larry Kudlow and the other dishonest Republican shills. The United States controls a full 1.58% of the remaining oil reserves in the world. We have 21.3 billion barrels of reserves versus 264 billion barrels in Saudi Arabia. We are currently producing 9 million barrels per day. At that production rate, the U.S. will deplete its proven reserves in the next 6 to 10 years. New discoveries will not be able to keep up with depletion of existing wells. The good news just keeps coming. Mexico’s oil production has been dependent upon one giant oil field since 1976. The Cantarell oil field produced 2.1 million barrels per day in 2003 at its peak. It is currently producing 464,000 barrels per day. Peak oil has arrived in Mexico. By 2015, the country that currently supplies 13% of our daily oil supply will become a net importer of oil. Drill Baby Drill.

Based upon the monthly import data below from the IEA, it would appear that, to paraphrase Chief Brody in Jaws, we’re going to need more corn. As the Obama administration operates in denial of these simple facts, they will continue to push ethanol and Chevy Volts to save us from dirty oil. We are already diverting 40% of our corn crop to the ethanol boondoggle. I’m sure that has nothing to do with the 98% increase in corn prices in the last year. Maybe tax credits for solar panels on SUVs and rubber band propeller cars will save the day.

We know for a fact that Mexico’s 1.2 million barrels per day will evaporate in the next few years. But, at least we have that solid dependable 2.7 million barrels per day (30% of our daily imports) from those stable bastions of democracy Nigeria, Venezuela, Iraq, Angola, and Algeria. Makes you want to go out and buy a Hummer. The storyline being sold to the American people is that there is no need to worry. Saudi Arabia will step to the plate and make up for any shortfalls throughout the world. Just one problem. Saudi Arabia is lying about their reserves and their ability to increase production. They’d fit in very well in Congress and on Wall Street.

Lies, Obfuscation, Misinformation & Denial

The late Matt Simmons made the strong case In his book Twilight in the Desert that Saudi Arabia has been lying about their reserves for years. Documents released by Wikileaks give support to this contention. Cables from the U.S. Embassy in Riyadh , released by WikiLeaks, urge Washington to take seriously a warning from senior Saudi government oil executive Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, that the kingdom’s crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

The UK Guardian reported:

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as “peak oil”.

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

One cable said: “According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray.”

The US consul then told Washington: “While al-Husseini fundamentally contradicts the Aramco company line, he is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered.”
A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports. “Demand [for electricity] is expected to grow 10% a year over the next decade as a result of population and economic growth. As a result it will need to double its generation capacity to 68,000MW in 2018,” it said.

It also reported major project delays and accidents as “evidence that the Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production.” While fears of premature “peak oil” and Saudi production problems had been expressed before, no US official has come close to saying this in public.

The overstatement of reserves by Saudi Arabia and most of the OPEC countries should be abundantly clear to anyone with a smattering of critical thinking skills. This eliminates just about everyone on CNBC or Fox News. Essentially, the self reported, unaudited declared oil reserves from OPEC members are a fraud. Production quotas for each member of OPEC are dependent upon their oil reserve amount. When this was instituted in the early 1980s, shockingly OPEC countries miraculously added nearly 300 billion barrels to proven reserves in a six year period with NO NEW DISCOVERIES of oil. The chart below shows the unexplained jumps in reserves in red. Do you honestly believe any self reported number from Iran or Venezuela? Dr. Ali Samsam Bakhtiari, a former senior expert of the National Iranian Oil Company, has estimated that Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates have overstated reserves by a combined 320–390 billion barrels and has said, “As for Iran, the usually accepted official 132 billion barrels is almost one hundred billion over any realistic estimate.”

Using some common sense, someone might ask, “How could Saudi Arabia’s oil reserves remain above 260 million for the last 22 years despite pumping over 60 billion barrels during this time frame, and not making any major new discoveries?” Maybe their statisticians did their training at Goldman Sachs or the Federal Reserve. The monster Saudi oil fields are over 40 years old. They will deplete. Oil is finite. They will not refill abiotically like some crackpots contend. Saudi Arabia’s production peaked in 2005 and it has been unable to reach that level since. The spin sheiks in Riyadh and spin doctors in Washington DC cannot spin oil out of sand. Peak oil is about to choke the American way of life.

    

The denial, accusations and misinformation have already begun. Congressional hearings will be called to blame Big Oil and the dreaded speculators. Americans always need a bogeyman to blame for their mindless decisions and willingness to be led to slaughter by corrupt politicians. Big oil companies do benefit from higher oil prices. Big oil companies spend millions buying off Congressmen. Big oil companies cut corners, ignore safety procedures, and seek profits by any means possible. But, they do not control the oil. Nations control the oil. Many of these nations are led by lying, corrupt, evil despots. That is a fact. Blustering moronic Congressmen going after oil executives and phantom speculators is just a sideshow. It will divert the non-thinking masses from the truth that our leaders haven’t allowed a refinery or nuclear power plant to be built since 1977. These leaders have promoted and subsidized corn based ethanol that requires more energy to produce than it creates and has driven the cost of our food sky high. We are more dependent on foreign oil than any time in our history.

The real speculators are the Americans who clog our highways every morning driving monster SUVs, turbocharged sports cars, gas guzzling minivans, and pickup trucks that make them feel like salt of the earth tough guys despite living in their 6,000 square foot energy sucking McMansions in suburban tracts 30 miles from their jobs, if they have one. The ignorance of the average American car buyer knows no bounds. The recent bounce back in auto sales was led by SUVs and pickups. The green clean cars are nothing but hype and bullshit. GM expects to sell about 10,000 Volts this year, and Nissan expects to sell about 25,000 Leafs in the United States, a piss in the ocean compared with the millions of sport wagons and SUVs purchased by Americans annually. Americans have the attention span of a gnat and are already dazed and confused by the surge in gas prices to $3.50 per gallon.

When oil prices spiked to $147 barrel in 2008, Americans were spending $467 billion per year for fuel. By early 2009, the collapse in energy prices due to the worldwide recession reduced the annual expenditure to $265 billion, freeing up over $200 billion for consumers to spend on other items, pay down debt, or save. Expenditures for fuel had already surged back to $400 billion before the recent spike in oil prices. Next stop $500 billion. That should do wonders for the faux economic recovery that has been touted by Obama and the MSM for the last year. The years of denial, lies, indecision, bad decisions, and inertia have left the country vulnerable and at the mercy of countries in far off lands that despise our way of life.

There are no good outcomes, only bad, really bad, and catastrophic. Take your pick. Could gas prices drop below $3.00 per gallon if the world sinks back into recession? Yes. But it would only be momentary. The easy to access supply is dwindling. The medium and long term direction of gas at the pump is up. There is nothing that can be done in the next five years to prevent significantly higher oil prices. A full court press of realistic ideas like converting our truck fleets to natural gas, a major effort to build nuclear power plants, more drilling, greater use of wind, geothermal, and solar would take at least a decade to have an impact. There is no consensus or resolve to undertake such an effort. Therefore, Americans will suffer the consequences. Be a good American and take advantage of GM’s no interest for 7 years deal on their biggest baddest SUVs and buy two. What could go wrong?

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HOW HIGH WILL GASOLINE PRICES GO?

by Cullen Roche

While the equity markets have taken some recent relief in last month’s economic data gasoline prices have continued to surge.  The most recent national gas price is $3.44.  This is up 10% from just 3 weeks ago when prices were $3.10. Prices are still 20% from their 2008 highs, however, the seasonal trends look very similar.  If one looks back at recent trends the seasonality is quite clear – gas prices always surge in the first half of the year.  Since 2005 gasoline prices have surged an average of 41% during the first two quarters of the year.

If prices were to surge even 30% from their January low prices would hit $3.80 by the middle of the summer.  If prices were to match their 2008 increase Americans will be staring at $4 gasoline and an equivalent of wiping out the entirety of the stimulative effects of the Obama tax cut.  I don’t think these are unreasonable estimates given the fact that the prior year rallies have lacked the two powerful exogenous forces that are currently driving prices – the conflict in the Middle East and the speculative aspects associated with QE2.  In fact, it would not be at all unreasonable to estimate that these prices are on the low end of potential price increases.   I think analysts are substantially underestimating the potential for higher gasoline prices and the impact on consumer spending.  This likely isn’t enough to derail the recovery, but it’s one risk markets are eager to overlook.

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WHAT IS THE IMPACT OF RISING GASOLINE PRICES?

by Cullen Roche

Joe Weisenthal of Business Insider posted a good rule of thumb today that helps quantify the impact of rising oil prices on the US economy. He posts a note from Deutsche Bank that says:

“According to our analysis, a $10 increase in oil prices translates into roughly a 25 cent increase in retail gasoline prices.  Every one penny increase in gasoline is then worth about $1 billion in household energy consumption.  (In decimal terms, it is actually $1.4 billion.) Therefore, a sustained $10 increase in oil prices translates into $25 billion in additional household energy spending.  Assuming this price rise crowds out spending elsewhere in the economy, effectively acting as a tax, means that a sustained $10 rise in oil prices reduces annual real GDP growth by 0.2%.”

Of course, oil and gasoline prices don’t move perfectly in tandem and the gas market can often work with a lag.  For instance, the average national gasoline price is up 21% since September, however, West Texas Crude is up 35%.  So the above math doesn’t compute perfectly.  If we just take out the following we can begin to grasp how much the increase in gasoline is impacting the consumer:

“Every one penny increase in gasoline is then worth about $1 billion in household energy consumption.  (In decimal terms, it is actually $1.4 billion.)”

So, the 21% gas price increase since September has cost the US consumer an extra ~$75B.  It’s not surprising that we have seen some signs of weakness in the consumer in the early portion of this year.  The bad outcome is if we continue to see gasoline prices surge into the seasonally strong summer driving season.  If gasoline prices were to average $3.75 by this summer it would be the equivalent of wiping out the entire tax cut that was recently passed.  If prices were to surge back to their 2008 highs it would be the equivalent of a $182B tax on the consumer since QE2 began.

Even worse are the unquantifiable effects.  How much does surging gasoline prices alter consumer behavior?  How much does oil increase the cost of other products?  Can these costs be passed?  How does this potential margin squeeze influence hiring trends?  No one can really know the extent to which rising oil & gas prices detract from overall economic growth and consumer behavior.  One thing we can confirm is that the baseline scenario above amounts to what is effectively a massive tax increase.  With a weak consumer we can be nearly certain that this tax will be multiplied through corporate America in the form of margin compression as companies fail to fully pass along any cost increases due to rising oil prices.

In sum, while this isn’t a fatal blow to the economy it certainly doesn’t help the overleveraged and underemployed US consumer.   It might not be enough to tip the US economy into recession, but it certainly doesn’t help the tepid growth outlook.

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Higher Pump Prices? Yes. But Not $5 a Gallon

By CHARLES WALLACE

Americans could see gasoline pump prices spiking 10% to 18% higher in coming weeks as a result of the unrest in the Middle East -- but they're unlikely go above $4 a gallon -- unless the uprisings spread to Saudi Arabia.

"We're going to see gasoline prices going higher in the next week, the next months and maybe in the next six weeks," says Tom Kloza, chief oil analyst at Wall, N.J.-based Oil Price Information Service. He forecasts a price in the range of $3.50 to $3.75 a gallon, up from the current $3.17 for a gallon of unleaded regular gas.

However, Kloza says he "disagrees vehemently" with analyst predictions that gas prices could shoot above $4 or even $5 a gallon. CNBC Tuesday quoted traders as saying gas prices could surpass $4 a gallon, and USA Today ran a front-page story saying that $5 a gallon gas "isn't out of the question."

One Giant Caveat

Kloza cites a good reason for why that seems unlikely: About 5.5 million barrels of excess capacity of crude oil are now available to drive prices down, of which the Saudis control 4.5 million barrels. And the Saudi oil minister rushed to assure the world on Tuesday that OPEC stood ready to raise output .

"Needless to say, everything is pure garbage if we wake up one of these days and we see there are riots in the streets of Saudi Arabia, or the royal family there is about to be overthrown," Kloza says.

Michael Lynch, president of Winchester, Mass.-based Strategic Energy & Economic Research, adds that increased Russian and Canadian production has helped boost world supplies as the crisis in the Mideast spreads. "Generally speaking, there has been a pretty good performance from non-OPEC producers, and I think that will continue," Lynch says.

Libya exports around 1.5 million barrels a day and has Africa's largest proven oil reserves. While it's an OPEC member, its effect on U.S. oil prices is limited because most of its output goes to European customers.

Deep-Seated Religious Conflict

A greater problem might be Bahrain, where deadly clashes have been ongoing for the last week. Although the island state has no oil of its own, it lies across a causeway right next to Saudi Arabia's oil-producing eastern province. Like that Saudi province, Bahrain has a large Shia Muslim population, but the country has been ruled by a Sunni monarchy. That religious conflict -- more than 1,000 years old -- is behind the violence in Bahrain and could threaten stability in Saudi Arabia. Of course, that would be far more explosive for the U.S. than the current chaos in Libya.
Lynch says another major concern is Iran. If pro-democracy violence escalates there, it could seriously hurt that country's exports, and the uprising potentially could spread to Saudi Arabia. "If Iran catches a cold, everyone worries about Saudi Arabia getting pneumonia," he says.

Kloza notes that as bad as the Libyan tragedy is, similar chaos has afflicted Nigeria for many months, yet oil has continued to flow to the U.S. without letup. One big difference, though, is that foreign oil workers have been evacuated from Libya, while they have largely remained in Nigeria.

Kloza says for gasoline to get above $4 a gallon, crude would have to rise above $125 a barrel. It's now around $106 for Brent crude, the European standard. "That couldn't be sustained for weeks and months as it was in 2008, when the trading community lost their heads," he says.

Why Brent Crude Prices Are Key

Kloza says consumers should focus more on the Brent crude price than the often-quoted gyrations of the U.S. benchmark, West Texas Intermediate. Although WTI is the focus of most financial transactions involving oil, Brent crude is a better price gauge because it more accurately reflects world oil demand, he says.

"The last thing you should do in the morning is wake up and hear that the price of WTI is up $5 or down $5 and assume that's what everything else is doing in the oil patch," Kloza says. In fact, WTI spiked $8 a barrel Tuesday, sending stocks sharply lower before retreating a bit, to close up $7.37.

The difference between Brent and WTI is around $7 to $10 a barrel, but it has been as high as $19. Still, the price of crude is nowhere yet near the level it would have to go before Americans find themselves shelling out $5 a gallon at the pump. With luck, it'll stay that way.

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Survivor Trading System - Trades of 14 February

I trades di Survivor System del 14 Febrraio. I risultati real-time di Survivor e di alcuni altri nostri trading systems sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp

Trades of Survivor System on 14 February. Real-time results of Survivor and our some other trading systemsare available at the following link: http://www.box.net/shared/5vajnzc4cp

Updates of Super Commodity Systems

SUPER COMMODITY OPEN TRADES
Soybean Meal - After a few days seems wants to break the trading-range with several divergences on daily chart.
Platinum - Nice trade, it is now on the first support. Here yowe can lightens the position.
Soybeans - The trade started well with several divergences on daily chart.

SUPER COMMODITY RECENTLY CLOSED TRADES
Gasoline - After a promising start the trade has been stopped at breakeven.
eMini Nasdaq -After closing with a good gain the previous long trade, the sell short reverse has been stopped with a small loss.

Gas Prices Hit Their Highest Level Ever For Mid-February

by Mike "Mish" Shedlock

U.S. gasoline prices have jumped to the highest levels ever for the middle of February. The national average hit $3.127 per gallon on Friday, about 50 cents above a year ago.

The price is about 6 percent higher than on this date in 2008. The next day, pump prices began a string of 32 gains over 34 days. They rose 39 percent over five months, eventually hitting an all-time high of $4.11 per gallon in July.

Although gas prices are expected to rise, most experts aren't expecting a reprise of 2008, when the price spike forced many drivers to join car pools and trade in gas-guzzling SUVs for fuel-efficient cars.

"It would be a mistake to think we're going to have that all over again," said OPIS chief oil analyst Tom Kloza.

He says oil demand will slide in the U.S. by May, as refineries slow fuel production while they switch to summer blends of gas. World oil consumption also may not rise as much as expected.

And Kloza contends that oil traders are more cautious now, after getting burned when oil plunged to $33 per barrel in early 2009, just six months after hitting $147 per barrel. Even the most bullish traders no longer think they can chase commodity prices higher without risk, he says.

Still, Kloza expects gas to reach $3.50 to $3.75 per gallon this spring because of the usual run-up in prices ahead of the summer driving season. That would mean an increase of 12 to 20 percent from the current level.

Crude Futures - Monthly Chart

Image: Mish's Global Economic Trend Analysis

Crude futures for now have stalled right at 50% retrace level of the 2008 plunge in spite of the recent turbulence in Egypt.

Unleaded Gasoline Futures - Monthly Chart

Image: Mish's Global Economic Trend Analysis

Unleaded gasoline futures and gas pump prices follow the price of crude as one might expect.

Note the seasonal nature of the moves. Gasoline prices (and crude futures) tend to rise from January until June or July in most years.

In 2007, there was a ramp from the beginning of the year that ended in April, followed by a pullback until July. From then it was straight up for a full year.

2009 was back to the familiar pattern of continued strength from the beginning of the year until July. 2010 had a July low instead of a high, similar to 2007.

Crude Futures - Daily Chart

Image: Mish's Global Economic Trend Analysis

Prices at the pump may be up, but crude prices are down since the start of the year as noted by the dashed line. Prices at the pump will head lower eventually if crude prices keep sliding.

Inability for crude prices to continue higher with events in Egypt and the Mideast might be meaningful. Moreover, interest rate hikes in China could start weighing on commodity prices in general, especially if those hikes come at a pace faster than expected.

There are a lot of variables in play, including seasonality, rate hikes in China, the extremely overbought reflation trade, Quantitative Easing, and price action weakness (except for a 2-day pop now taken back) in the face of events in Egypt.

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