Cameron Hanover Perspectives On 2011 Energy Markets
From Peter Beutel of Cameron Hanover
Morning Petrospective – December 31, 2010
We are officially on vacation, but had originally expected Friday to be an exchange holiday. Why? Oh, just because the Nymex had always been able to place greed on the back burner for at least one final day at the end of each trading year, in a sort of sacrificial immolation of that most valuable of all commodities – time. It seems a strangely appropriate summation of 2010 that the exchange’s final act for the year has been the cruel and spiteful denial of a day off, a move from the sacrifice of time to human sacrifice - at long last. And that was 2010.
Where 2008 had seen the almost accidental move of investors from stocks to commodities, 2010 saw the almost willful, wide awake version of that. In 2008, investors woke up and noticed, “Wow, we aren’t buying Exxon or Chevron any more to get long in oil; we are actually buying oil.” In 2010, investors just bought oil, knowing that that buying would push prices higher. It seems likely to continue in 2011.
As we end the year, prices have sold off on their penultimate day of trading, on profit-taking and because prices were overbought and in resistance. This week’s DOE report showed a smaller drawdown in crude oil stocks than had been expected, and that was slightly bearish. But, traders and investors will be going home … another day later than in any previous year … armed with a supportive weekly unemployment report. This week’s report showed the fewest number of workers filing unemployment insurance claims in the last two-and-a-half years, Dow Jones noted. Even though the numbers no longer mean what they say they mean, we are still comparing apples to apples, albeit (or all-be-they) like comparing Red Delicious to Crab Apples at this stage.
Fewer people looking for jobs could be construed as positive news and is being seen that way in the context of the latest employment report. We will get a bigger and more comprehensive look almost right away at December as a month. But, in another glaring example of zeitgeist – or a sign of the time we live in – people who have stopped looking for work are no longer listed as unemployed. They have given up and therefore must be happily unemployed. Oh, dear. Where does one begin? Indeed, where does it end? These statistics, and ones like it, are driving oil prices higher as we end 2010.
Investors, who really do not want any large amounts of physical oil and who often are the very ones at greatest risk of being looted by inflation or a weaker dollar (union pensioners, college foundations, and mutual fund refugees), are the same ones bidding oil prices higher. They are using oil or other commodities futures or options to hedge against inflation, a weaker dollar, stronger precious metals prices or an economic recovery. It is hard to go a week without one of those pushing quotes higher.
But, wait … aren’t there even deeper, broader markets in actual instruments designed to protect against inflation … in currencies that are not the dollar … in gold and silver … and for the shares of companies … traded under an old buttonwood tree at Broad & Wall? … Yes … although the buttonwood tree died a while back, so they moved indoors, and they called it a Stock Exchange. It actually does quite a brisk trade in equities, we’ve been told. But, rather than buy Exxon or Chevron, investors buy oil.
So, at least in theory, couldn’t we actually hedge against inflation by buying gold or even silver? And, not to be contrary or revolutionary or anything, but couldn’t we hedge against weakness in the US dollar by buying (you might want to sit down, first) foreign currencies? Or, couldn’t we prepare ourselves for stronger economic growth by buying and actually participating in the capitalization and running of internationally-known companies whose shares are listed on any number of stock exchanges instead of jeopardizing the economic recovery by taxing the economy through higher oil prices?
Sure we could, in theory anyway, but why use a perfectly good market designed for businesses with daily exposure to the risk of rapidly-changing oil prices for hedging against that very problem when we can muck everything up by using oil derivatives to hedge all these other risks as well? Wouldn’t that be fun? We could watch investors try to squeeze massive trading volumes designed for larger currency or equities markets into markets like heating oil and gasoline. Who doesn’t love watching sausage packers trying to get 20 pounds of trimmings into five-pound casings? And, what possible harm could there be in shaking down consumers for hundreds of billions in unexpected and “unelected” tax increases – right after they went to vote and told everyone that they are not especially fond of undiscussed, undisclosed and lavishly disguised taxes?
No wonder the exchange wouldn’t give us the day off; imagine if we had had time to think about any of this stuff? It is why higher prices, at some point, seem certain this coming year.
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