More Record Prices in Gold, Silver and Oil Ahead

By: Midas_Letter

The prices of oil, gold and silver are all presently being pushed higher by the expansion of popular protests throughout the middle east. Despite the confident public statements officials in Washington, Saudi Arabia, and Israel, rest assured that the level of nervousness within those governments are at their highest in decades. In tandem with the elevated discomfort in those administrations, the markets continue to notch higher, with commodities leading the charge.

But if the perfect storm of commodity price influence that is currently just a feint wind blowing continues to strengthen, the prices for these commodities are going to surpass their all-time records in the first half of 2011. That means topping $1,432 an ounce for gold, $49.95 an ounce for silver, and $147 for a barrel of oil.

Those two paragraphs were written yesterday before gold broke that record, and silver set a new 30 year high. Oil is powering higher, and though $147 is almost a 50% increase from here, remember that when the price spiked to that level back in July 2008, on March 4th, only 4 months earlier, it was trading at the $100 range.

From 10,000 feet there’s no surprises. The U.S. Dollar is in the final stages of deterioration, the nation it supports is broke and is essentially in a state of default. The pretext of military intervention facilitates the deployment of armed forces into the world’s oil producing regions. The U.S. dollar propaganda machine, incessantly ballyhooing an economic recovery by pointing to the ersatz evidence of robust equity markets, disingenuously overlooks the fact that the percentage increases in the Dow mimic exactly the percentage increases in bogus dollar production.

The only real surprise is the sheer audacity of the American political establishment and its rapacious capacity for feeding off of its own impoverished public, anesthetized daily by the talking heads and forced to lean harder into the strengthening force of that foul wind. Everyone outside of the U.S., and many within comprehend perfectly that the biggest financial collapse in history is still underway, and accelerating.

Egg-head analysts are increasingly impressed with their needlessly complex models of future resource consumption. These point to a world where we’re running out of everything in terms of basic non-renewable commodities. Those that are agriculturally generated are starting to bump up against the ceiling of maximum possible production, while the land required to produce them is incrementally compromised by diminishing arability.

The final converging front of said storm of perfection is manifested by the inevitable outcome of the information age begun nearly 20 years ago. Despotic leaders, fortified by U.S. dollars and military support, can longer conceal the treasonous relationship that forms their base of power, and coincidentally, net-savvy youths are organizing and sharing information at an unprecedented rate. The result, collective outrage, is expressed in the form of protests morphing into revolutions morphing into toppled authoritarian governments.

The only thing keeping China and Saudi Arabia from the same fate is robust economics and ferocious domestic policing. The moment the scale tips toward poverty and hunger is the moment no amount of internal brutality suppresses what becomes a preference for a noble death over a miserable life. That equation is natural law. And natural law, unlike the self-serving rules foisted on the public sheep and labeled “The Law”, cannot be broken.

The Chinese bubble, involuntarily and feverishly inflating through the simple requirement of nourishment to sustain its unfathomable scale, speeds toward the inevitable pop, which is the sound heard in the not-so-distant future when the return to tribal warfare marks the completion of the ultimate cycle.

All these factors converge to form insatiable demand for tangible value in direct proportion to the inundation with paper anti-value. That gold and silver are the principle recipients of that demand is, as noted, no surprise.

This weekend upcoming will see the beginning of the Prospectors and Developers Association of Canada convention at the Toronto Convention Center. This is the world’s largest mining investment and finance conference in the world, and the expectation this year is for a sell-out crowd. The reason for that is while the prices of the monetary commodities gold, silver, platinum and palladium, and the energy commodities oil, gas, uranium, lithium, coal and rare earths, all power higher, the companies that explore for and ultimately produce these commodities are where the really big money is made.

The PDAC conference is the single most important gathering on the planet to discover investment ideas, listen to presentations by such companies, as well as a wide range of speakers on topics from mining economics to picking stocks.

Its all about leverage. Whereas the price of gold and silver is just about guaranteed to keep rising in view of all the factors cited above, investors with higher risk tolerance who want to leverage their investments to these prices in the desire to realize gains above 100% within two years can do so by investing in TSX and TSX-listed commodity stocks.

Gold will likely pile on another $80 – 100 in the coming year, as it has done for the last 10, which will give it a performance increase over one year of 6.9% . But buying a junior gold explorer for $0.50 a share, and seeing that company drill a major intercept that immediately carries the stock to $5, is a 1,000 % performance, or ten-bagger – the holy grail of resource investment.

So you can keep buying the platitudes of CNBC and the Wall Street Journal and CNN, who want you to think your funds are safer with the major American investment banks who are their sponsors, or you can quit getting fleeced by the U.S. government-backed financial services industry and come join the land of the free up north in Toronto for 4 days and see how it feels to make a pile of dough.

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The Stock Market May Plunge

By: Bob_Clark

We have seen a larger than normal pullback in the general stock market.  The media is already trotting out the perma bears to be interviewed.  They are quick to point out how over extended the bullish consensus is. They are right, it does not matter which one you look at, they are all saying the same thing.

They have been flashing a danger signal for months however and it has kept many traders from doing what traders have to do to make money.  Which is trade with the trend.  I thought that I would take a look at the stock market from a different angle.  One that has no emotion.

Lets see what the cycles are telling us.

In this article I have narrowed down my focus.  So for reference, I suggest that you review my recent article "A safer time to buy stocks is coming soon!"  In it, I laid out the bigger picture and showed how we would go to new highs in February and then turn down.

If you wish to read more of my calls on the markets, you can click on my name beside "also by", at the bottom of the article and find more of my work.  

Trading cycle low

In the chart the $SPX below, I have marked in the 4 month trading cycle with arcs.  There is often a variable with cycles which can be confusing.  They can shift when they make the lows. They can come in early or late. Often they return to the normal cycle later, but for traders using only cycles to gauge their entries, it can be frustrating.

We have a possible shift to be dealt with now.  I have marked it with a "?" because it is only a potential shift. Notice that we never went below the low that I have marked at the end of October. The end of October, or the beginning of November was when the 4 month trading cycle low was due, as it related to the low on July 1st.  So technically there was no violation of the end of October low.  The problem is that the low in mid November looks more like what a 4 month low should look like.  So we have to keep that at the back of our minds and trade accordingly.

I have put in the variation with the dotted arc.  If we did shift and don't return to normal, then we can make the low in mid to late March, which is often when we see a large sell off in the stock market.

Look at last April 

Shorter term, we have just made a 1 month low (blue dot).  It is a fairly constant cycle and can be used to measure the status of the larger 4 month cycle.  They bottom together or nest as well.

Let me point out what happened in late April last year.  I have marked an early turn in the 1 month cycle, which was caused by the downward pull of the larger 1 year cycle (I have not marked in the 1 year cycle but it bottomed in July), as it was going down at the same time as the 4 month cycle rolled over.

What happened to the 1 month is called early translation.  It can happen again now, if and it is only an if right now, we still have to make the 4 month low in March. Notice when the April low failed, it went down all the way until the end of the month. Now look at what happened in November.  Once the 1 month turned, it was basically down until the end of the month as well.

Finally, I want to point out that it is now 8 months since we made the 1 year low in July.  That means we are more than half way along in the 1 year cycle and tells us that when the next 4 month cycle tops, we will fall into the nest of the 1 year and 4 month lows in the summer. 

Conclusion

First, lets consider the 1 year cycle.  We are getting late in it's duration.  Does that mean we stop the rally here?  We could, but I do not think we will, for several reasons.

First, we have a huge reflation under way, which means money is flowing into the markets. The economic statistics are showing improvement in an extremely fragile world wide situation that can not stand a set back. 

Second, it is the third year of the presidential cycle and the fund managers like the odds of staying long, so they will be picking at any low hanging fruit.

Third, we have not reached the main target for this move which is above 1400.

That does not mean we do not protect ourselves from a rollover of the 1 year cycle.  Every trade we make must have a protective stop loss.

Summing up

If we focus on the 4 month trading cycle, the 1 year cycle will take care of itself.

The way I am reading this, is that I am assuming we now have a good 1 month low in place . It is possibly the 4 month low as well.  As long as it holds,  I will assume the 4 month low has also occurred. 

In a previous article, I pointed out that normally a 4 month low is preceded by approximately one month of selling and that may become the case here as well. 

My ideal entry would be in March, after a month of selling. Some fear in the markets would be a bonus.

We normally see strong fund demand at the beginning of each new month. So we should see strong buying right now. 

If we do not.  Then subsequently, we can not hold the resent low.  It will signal an early translation top in the 1 month cycle and that will indicate we have not yet made the 4 month low.  That would mean a bigger decline is likely.  My first target being in the 1240 area. I don't expect a huge clunk like we saw in April.

Keep in mind that until we break the low, we are still in an uptrend and possibly have made the 4 month low already. Today's drop being only a stop cleaning swipe, before we ramp higher.

Learn more

Cycles can only take you so far.  To trade with courage and confidence, it is vital that we understand market structure and know where the big traders will trigger their entries.  It gives peace of mind, knowing we have the Fat Boys on our side.

I teach the trigger points that the Fat Boys use for their orders.

The key is to know in advance what should happen at a specific point. If it does, you are on track, if it does not, then you know something is wrong and you step off, or stay out.

Technical indicators do not work, neither does fundamental analysis. The Fat Boys use both to trap investors. It gives them the other side of the trade, allowing them to enter positions.

I offer real time, one on one, learn to trade courses. There is also a powerful video set available. Both will get you on the right track in the new year. It is the same track the Fat Boys are on.

They control the markets and if you are not with them, then you are a victim.

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U.S. Housing Market, More Trouble in Squanderville

By: Mike_Whitney

Bob, Frank and Freddie all bought identical houses in the same neighborhood in 2004. Each man paid $300,000 for his home.

Bob paid the whole $300,000 in cash. Frank put down 10% (or $30,000) and took out a $270,000 mortgage. Freddie paid $0-down on a 100% mortgage.

In 2005, home prices rose by 10% which means that Bob made 10% (or $30,000) on his original investment. Frank made 100% on the $30,000 he put down. Freddie made the biggest windfall of all--he made $30,000 in "pure profit".

Question: Which one these three men is most likely to be the banker?

If you guessed "Freddie", you're right. Banks don't like committing capital because it limits profitability. This is why the big banks have fought so ferociously for deregulation, so they're not constrained in the amount of money they can make (via credit creation) with little capital. Of course, when the banking system is propped atop tiny specks of capital, it becomes more wobbly and crisis prone. And, if asset prices suddenly nosedive--as they did when the subprimes exploded--the whole shebang can come crashing down.

The real root of the financial crisis was leverage. The banks were massively over-leveraged (some of them 40 to 1) just like our friend Freddie. This is no longer a matter of dispute. In testimony he gave to the Financial Crisis Investigation Commission (FCIC), Ben Bernanke admitted that 12 of the country's 13 largest banks were underwater.

"If you look at the firms that came under pressure in that period... only one... was not at serious risk of failure," Bernanke told the commission.

So, the banks borrowed too much and were gravely under-capitalized. So when asset prices fell, they were wiped out and the financial system crashed. It was not "the perfect storm" as Wall Street cheerleaders like to say. It was the inevitable outcome of risky behavior. There's nothing unusual about a bank run, especially when the banks are capital-depleted and acting like lunatics.

The housing market would not have collapsed if everyone had acted like Bob. (and paid in cash) In fact, things probably would have been fine if people merely put 10%-down, like Frank. The problem is Freddie. 0-down loans are inherently unsafe because they give the borrower an option to "walk away" if the market tumbles. If housing prices drop 15%, for example, the best business decision for Freddie is to leave the keys on the kitchen counter and find a cheap place to rent. In other words, 0-down creates an incentive to default. And, that's exactly what's happened.

When banks act like Freddie (over-leveraged), the situation is even more dangerous, because a run on the banks can crash the financial system and lead to a Depression. When subprime blew up, institutional investors tried to dump their mortgage-backed securities (MBS) at the same time. Trading stopped as everyone ran for the exits. The secondary market froze and the global financial system suffered a massive heart. Nearly three years later, and the patient is still in ICU on a drip-feed of zero-rates and QE2-nitro.

So, what did the banks learn from that near-death experience?

Nothing. In fact, they've rebuilt the same exact system that blew up less than 3 years ago. And, Ben Bernanke, Timothy Geithner and Barack Obama have helped them every step of the way. This is from Bloomberg:

"Bankers are fiercely resisting the suggestion that they use more equity (capital) and less debt in funding, even though this would reduce their dangerous degree of leverage...

Fixation with return on equity (ROE) also contributes to bankers’ love of leverage because higher leverage mechanically increases ROE, whether or not true value is generated. This is because higher leverage increases the risk of equity, and thus its required return. Focus on ROE is also a reason bankers find hybrid securities, such as debt that converts to equity under some conditions, more attractive than equity....

...the structure of current capital requirements distorts banks’ decisions. The structure, which is focused on the ratio of equity to so-called risk- weighted assets, might induce banks to choose investments in securities over lending, because securities with high credit ratings require less capital and thus allow more debt funding...

The proposed solutions that regulators in the U.S. are focused on, such as resolution mechanisms, bail-ins, contingent capital and living wills, are based on false hopes. They can’t be relied on to prevent a crisis. Increasing equity funding is simpler and better than these pie-in-the-sky ideas." ("-Fed Runs Scared With Boost to Bank Dividends", Bloomberg)

What does this mean? It means that there are strong incentives for the banks to maximize borrowing and put the system at greater risk. It means that banks can't be as profitable by issuing loans to small businesses and homeowners. It means they would rather dabble in all manner of complex paper assets (so they can skim off huge salaries and bonuses) then provide money for productive activity that that creates jobs and revitalizes the country. It means that the financial system in its present configuration is just as dodgy and unstable as before. It means that we are headed for another meltdown.

Wall Street has a word for all of this. It's called "regulatory arbitrage", a fancy expression that means avoiding the rules and doing whatever-the-hell you want. This explains the widespread use of off-balance sheet operations, SIVs (structured investment vehicles), securitization, exotic derivatives contracts, and all of the other opaque debt-instruments that fall under the cheery rubric of "innovation."

All of these so-called innovations have one goal in mind, to maximize leverage so that profits can be derived from infinitesimal specks capital. The problem is, that when financial institutions are highly-geared (leveraged), it only takes the smallest downturn in the market to wipe them out. (Bloomberg: "If 95 percent of a bank’s assets are funded with debt, even a 3 percent decline in the asset value raises concerns about solvency and can lead to disruption".)

And, guess what? The banks are still up to their old tricks. Take this for example (from the New York Times):

"When the mortgage securitization market collapsed amid a flood of defaults and foreclosures — many of them on loans that should not have been made — the cry arose for lenders to have “skin in the game.” To properly align incentives, the argument went, those who make loans must suffer if the loan goes bad.

That principle was enacted by Congress last year in the Dodd-Frank law, but the mortgage industry managed to persuade legislators to insert an ill-defined loophole that would allow at least some mortgage loans — and perhaps nearly all of them — to escape the requirement that banks retain at least 5 percent of the risk....

Much of the banking industry has been pushing for an expansive definition that would leave few, if any, conventional loans subject to the skin-in-the-game requirement. To hear them tell it, there is virtually no way that any bank would make a mortgage loan at a reasonable rate if it had to share in any losses."

("Looks Like Banks Lose on Risk Plea", Floyd Norris, New York Times)

Got that? The banks still do not want to put one stinking dime behind the garbage paper they are creating. They are still fighting to securitize loans with no skin-in-the-game. See? They're all Freddies.

After the trillions in bail outs, one would think that the banks would be grateful. But, no. In fact, if the capital requirements are implemented, many of the banks may just pack up and leave. Here's the story in the Wall Street Journal:

"Some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.

In November, Barclays PLC quietly changed the legal classification of the U.K. bank's main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.

The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.

"It's just not worth it to have all that capital trapped" in the holding company, said a New York lawyer who is advising banks on how to restructure....

Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer." ("Banks Find Loophole on Capital Rule", Wall Street Journal)

"Ingratitude, the marble-hearted beast!". Shakespeare must have known a few bankers in his day, too.

And, here's the corker; the banks are still broke. Aside from the fact that housing prices are falling sharply (increasing the banks loan losses) and that there will another 2 million foreclosures in 2011, the real condition of the banks books are still hidden from public view. Here's a glimpse from the WSJ's Michael Rapoport,:

"During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.

But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.

In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.

Unrealized losses are just one way in which the troubled assets obscure banks' true financial condition, accounting experts say....Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line.

Making the picture even murkier, the value of many risky assets are based solely on the banks' own estimates—leaving valuations uncertain and, some critics say, overstated....

One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify." ("Toxic' Assets Still Lurking at Banks", Michael Rapoport, Wall Street Journal)

"$360.7 billion" in garbage assets and financial stocks are still in the stratosphere?!? No wonder Bernie Madoff called the whole thing a "Ponzi scheme".

No one knows the true condition of the banks books because the accounting fraud is so thick that's it's impossible to see through it. Here's the scoop from the WSJ on how the Financial Accounting Standards Board (FASB) caved in to Wall Street and gave them the go-ahead to lie as much as they want:

"The banks got what they wanted. Accounting rule makers on Tuesday dropped a plan to require banks to value loans using market prices.

That means investors will remain reliant on banks' own views of the worth of their assets. Those judgments proved seriously flawed during the financial crisis and left many with insufficient capital. Taxpayers, who as a result were called upon to bail out numerous institutions, also are left more vulnerable.

The Financial Accounting Standards Board's original proposal, put forward last spring, had called for banks to reflect market values in the total worth of their assets, which would affect their equity....Banks generally oppose the use of market prices because, they say, it makes their results more volatile. Their intense lobbying efforts against the proposal likely got a leg up after FASB Chairman Robert Herz, who had supported the plan, unexpectedly departed in August. FASB cited strong opposition it received in public comments in changing course.

Its decision means banks largely will continue to value loans as they do today, basing values on their original cost less a reserve to reflect the possibility of loss. FASB has yet to decide if the market value for loans will be disclosed on the balance sheet or buried in the footnotes, as they are now." ("Banks get the green-light to cook the books", Wall Street Journal)

So, imagine that you, dear reader, took out a loan at the bank by posting your $2.5 million dollar home in Beverly Hills and your custom Maserati for collateral. Now imagine that the banker decided to check up on your claim and found that you actually rode a rusty Schwinn bike to your job of collecting cans by the side of the freeway and lived in a cardboard lean-to next to the sewage-treatment plant. How long do you think it would take before the bank recalled your loan? Of course, if you were a banker and had an army of lobbyists working for you, you could lie to your heart's content and no one would be the wiser. But the truth remains: the banks are broke. The rest is smoke and mirrors.

One last thing: Along with the accounting shenanigans, the toxic assets, the non performing loans and the gigantic leverage, the banks are also hiding millions of REOs "off market" to keep housing prices from plunging even further. This "shadow inventory" will continue to be a drain on bank resources while keeping house prices "bouncing along the bottom" for years to come. Here's a clip from an article by Mark Whitehouse:

"Banks’ vast pile of foreclosed homes doesn’t appear to be diminishing. That’s a troubling sign for the future of the housing market.

Back in April, this column tallied up all the foreclosed homes sitting in banks’ inventory, as well as the “shadow” inventory of homes in the foreclosure process or on which owners had missed at least two mortgage payments. At the time, we reported that at the current rate of sales, it would take 103 months to unload it all.

Over the past six months, that number has actually risen. Banks managed to pare down the shadow inventory, but largely by taking possession of foreclosed homes. As of September, they owned nearly 994,000 foreclosed homes, up 21% from a year earlier. The shadow inventory stood at 5.2 million homes, down 7% from a year earlier. Grand total: 107 months of inventory.

The numbers aren’t exactly comparable to the April analysis, as the providers of data have changed. The inventory data now come from RealtyTrac, the shadow inventory data from LPS Applied Analytics, and the sales data from Core Logic. But no matter how you slice it, the housing market faces almost nine years of foreclosure hangover.....

The mountain of foreclosed homes casts a long shadow." ("Number of the Week: 107 Months to Clear Banks’ Housing Backlog", Mark Whitehouse, Wall Street Journal)

The dismal plight of the housing market hasn't changed much since Whitehouse wrote this article a couple months ago. The bleeding continues and prices are falling fast. If Obama doesn't come up with a remedy soon, the banks will be back on the front steps of the US Treasury with their begging bowls in hand. You can bet on it.

Botton line: The people who caused the financial crisis have reassembled the same system piece by piece paving the way for another massive meltdown.

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Where Are Crude Oil Prices Going?

By: Marin_Katusa

Marin Katusa, Casey’s Energy Report writes: The oil picture is always complex, but right now things are about as complicated as they can get.

The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections.

Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change.

Yemen and Bahrain are unsettled, to say the least.

And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria - with Libya inching closer and closer to full revolution status - matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.7 million barrels a day. Libya is Africa's third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya's oil supply has been disrupted (one report pegged it at 6%). But Libya's second largest city, Benghazi, has fallen to protestors, and it is in the country's east, where the oil fields lie.

With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country's next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.

The price of oil responded to Libya's instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. "That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable."

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted.

Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now - they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up - speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks - Brent and WTI - is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe's North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world's oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn't yet passed US$92. When you add in the fact that no one really knows what's going on in the world's fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya's potential revolution poses a real threat to oil supplies - as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see their day in the sun. In the upcoming issue of Casey’s Energy Report, Marin and his team introduce a new standard to – for the first time ever – compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you.

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Stock Markets and Crude Oil Prices

By: Asha_Bangalore

The turmoil in the Middle East and North Africa has led to higher oil prices (see Chart 1, data plotted up to 3/1/2011).  Brent crude oil was trading at $116.99 ($113.07 on 3/1/2011) as of this writing and West Texas Crude was quoted at $101.68 ($99.63 on 3/1/2011).  The Libyan crisis has raised oil prices significantly in the last three trading days.  The crisis in the region commenced the day after a Tunisian man set fire to himself on January 21, 2011.

However, equity prices have moved up since January 1 in the entire world, with the Dow Jones World ex-US index up 3.2% year-to-date.  Brazil and India have not joined the equity market party, but equity prices in Australia, U.S., China, France, Germany, Japan, and UK have posted year-to-date gains since December 31, 2011 (see Table 1 and Chart 2).

In the case of the U.S, equity and oil prices have a strong positive correlation (see Chart 3).  Oil prices, for now, are a high relative price, with contained overall inflation in the U.S. The Fed is watching closely to apply the monetary policy brake, if signs of higher energy prices seeping into prices of others consumer goods and services emerge. 

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Gold, Silver, Crude Oil, SP500 and Dollar Long Term Trends

By: Chris_Vermeulen

Trading with multiple time frames - Every now and then it’s always a good idea to look at some different time frames to be sure you have a solid understanding for the longer term trends in play. I will admit that it’s easy to get caught up in trading the shorter time frames like the 1, 10, and 60 minute charts especially when there are large intraday movements. But every night you must reset your thinking by looking at the bigger picture.

Below are weekly and daily charts which I think provide a big picture view of things.

SPY – SP500 Index Fund – Weekly Chart
You will see that in both 2009 and 2010 we saw a 5-8% correction down to the key moving averages. I feel that we are in store for a similar pullback in 2011. After that we will most likely continue higher.

US Dollar Index – Weekly Chart
The dollar is trading down at a key support level which I am keeping a close eye on. If we get a close below this trend line then we should see the dollar sell off sharply which in turn will trigger another leg higher in commodities across the board.

Crude Oil – Weekly Chart
Crude oil has really taken off because of the fears coming out of the Middle East. From the looks of it the next key pivot level is the $110 level.

Gold – Daily Chart
Both gold and silver have made new highs but after such a run I expect we see a quick pullback before they go higher. Gold and silver are the two investments I think everyone should hold a core position for the long run no matter what happens to the price. But, if we do get a nice quick pullback into the key moving averages then I think it’s a great spot get involved with more money.

Mid-Week Trend Report:
In short, I am bullish on stocks and commodities and bearish on the dollar and bonds. The one issue I see going forward is that if the dollar breaks down it will most likely help boost oil prices which in turn puts downward pressure on stocks… So depending on how things unfold in the Middle East and a falling dollar, we may not see higher stock prices. Some individuals are forecasting  $150-220 per barrel and I know if it gets back up there it will definitely slow the economy and stock prices down…

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