Guest Post: There's Something Happening With Oil

Tyler Durden's picture

Submitted by Yves Lamoureux of Blackmont Capital

There's something happenening here!
What it is ain’t exactly clear. There’s a man with a gun over there.
Telling me I got to beware. I think it’s time we stop, children, what’s
that sound. Everybody look what’s going down.

                                                                            -Buffalo Springfield-

And what’s going down is oil. After our recent warnings on gold, the yen and the carry trade unwinding here comes the energy sector. A big part of inflationary expectations that will get unwound too.

For the last two decades the trend of inflation has been easing. The same as applied to the general trend of the percentage growth in the GDP. One big problem for managers is to drive looking forward rather than manage backward. Oil as an echo bubble will quickly fade away and will bring better prospect at anchoring inflation expectations.

Armed with some of the best real return on treasuries for years, we decided to study the behavior of oil to bonds. We have used the ishares Barclays 20 years ETF as our bond proxy to compare to crude oil.

It becomes evident that in general when oil drops you will see an upturn in the price of the bonds. That’s in theory what you would expect. I also checked the opposite where oil rallied. In fact the TLT used as a proxy does go down and confirms the behavior in both direction.

I believe that with lower sustained inflation expectations a lower term premium will be required for holding bonds.

We are in fact headed back in term structure to the 50’s and 60’s……

Yves Lamoureux, Investment Advisor, Blackmont Capital inc.

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

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anynonmous's picture

Representative to Sheila Bair:

"Isn't Goldman Sachs a bank?"

ahhh no

 

http://www.c-spanvideo.org/program/ID/216686&start=2835&end=2911

 

Anonymous's picture

actaully, in reality gs is a bank as they have been awarded the same kinds of guarantees and backstops that in the past has only been for commercial banks.

Anonymous's picture

As I recall they morphed themselves into a bank holding company.

Anonymous's picture

Silliness.

Oil is priced in dollars and is moving with the dollar.

Internet Tough Guy's picture

+1.

I stopped reading after the line about 'inflation has been easing for the last two decades'.

Whizbang's picture

I'm not sure if anyone is paying attention, but despite bernanke's best effort, we are still in a deflationary mode. (not for the last decade, but certainly for the last two years) Although gold has experienced a nearly incredible bounce, equities and oil are still down significantly from their highs. (oil down over 50%) general costs such as fuel, food, housing, commodities and consumables are down tremendously over the last two years. May I remind everyone that gas was $5.85/ga for regular in L.A. last august. Although inflation is possible in the future, for the time being, prices will continue to deflate. Without government and fed intervention, deflation could've been debilitating.

Internet Tough Guy's picture

Oil was under $20 ten years ago. And the DJIA is up 10x in the last 20 years.

But if you measure from the oil spike of $150 last year, it must look like deflation. And you probably work for the fed, calculating CPI.

Green Sharts's picture

Maybe he works for Tesco, 3rd largest retailer in the world, whose CEO said earlier this week they are seeing slight deflation in aggregate across the goods they sell (which is a wide range, from food, clothing and consumer electronics to services like telephone plans and auto insurance).  Or perhaps he works for Kroger, which reported Q3 earnings earlier this week:

http://www.earthtimes.org/articles/show/kroger-reports-third-quarter-200...

"Kroger said several factors influenced its performance during the quarter, including persistent deflation, increased competitive activity and the cautious spending behavior of customers."

Anonymous's picture

"Without government and fed intervention, deflation could've been debilitating."

Wait, wait, wait, not so fast Johnny. I beg to differ especially as a renter who could otherwise be able to buy a house should government let real estate's price come down to where it belongs.

How exactly deflation is a bad thing? I don't get it. If I bought a computer 3 threes ago at 1000$ and find out the same model costs only 500 today, what's going on? Is there a mass deflation hitting the high tech field? Shall I call Bernanke to inject some TARP into the PC market to stabilize the price?

There's nothing wrong w/ price coming down. It's a healthy sign of economy b/c better productivity brings better quality and thus lowers the cost of a product.

As for the ongoing so-called "deflation" in the housing market, that's just a correction on over-priced goods. No more, no less. Government should stay out of way and let it happen.

What happens now instead is government taking money away from responsible people like me and then redistributing it to those jumping onto the risky over-priced real estates.

In a sense, I'M FORCED TO SPEND MONEY TO MAKE SURE I'M NOT ABLE TO AFFORD A HOUSE. Yeah, I HAVE TO SPEND MONEY TO MAKE IT EXPENSIVE TO ME. How f*cked up is that? That is what I called "debilitating". Welcome to Obamanomics.

That's why I buy gold. I cannot prevent them from stealing purchasing power from my future salary but at least I can save my current money in gold.

Anonymous's picture

Oil is a tangible commodity of which there is a limited amount. Dollars are limited only by the amount of paper, ink, and electricity it takes to run the printing press.

Your argument requires one to believe that the govt and fed intervention and 'reflating' will be done with just the right amount, and not too much, and that they actually somehow know the right amount. See Wiemar Republic to see the other side of the coin and what can happen when inflation gets out of control...

Which one would you like to have? Too bad you dont get to choose. Bernanke and friends have decided for you that inflation is better.

delacroix's picture

if you did the regular shopping for groceries, you would know that prices have slowly been creeping up.granted, in the last 5 months, there has been a bit of a break, but it can't last.

moneymutt's picture

I agree with the deflation bet, but I think how look at inflation is flawed. While prices of most consumer goods deflated in past decade until oil topped out, housing, health care and education have increased in price greatly, at least in US. I like cheaper computers, cheaper appliances and toys, but really really the cost of housing, health care and education compared to wages has been taking out the middle class, an no amount of cheap lap tops will make up for that, all while Greenspan was feted for cheap interest rates and low inflation.

I think deflation is coming due to credit contraction, but nobody has been even watching what is truly costing working people...price of gas is noticeable, but doesn't anyone see what they and their employer is paying for health care, doesn't the tuition costs are even state schools freaking anyone out? Even with house price reductions, families are still paying way more than they did a generation ago,  for way longer terms, to get what a single school teacher's saalry could buy and pay off in 20 years in 1960

ATG's picture

We are long sulphur, crude, gaso and HO...

Big4 at

http://www.jubileeprosperity.com/

alexdg's picture

WTIC has fallen faster than the dollar has recovered.

Anonymous's picture

So oild going down to 12$?

I think those guys in Copenhagen will love to hear that news. Every envirmental group may stop by then and watch everything go to hell.

Anonymous's picture

If oil really did go to 12 or even as low as 30, you can probably forget about any foreign bonds getting paid from the OPEC nations. Implosion in 5, 4, 3, 2...

steve from virginia's picture

 

Comparing crude oil to other securities is always interesting.

Comparing crude to dollars is where the economic action is. The current oil/dollar trading band is a dead end. If oil prices cannot rise the implication is a very hard dollar, indeed. Since everyone in the mechanized world uses oil or an oil substitute the dollar relationship is meaningful. The outcome of the hard 'petro-' dollar is the unwinding of short- dollar positions, the unwind of the dollar carry trade and eventually the end of the Bernanke Put.

.

 

 

Anonymous's picture

It might be even worse than you think.

There are many presures downward.

Take a good look at the energy supply side. We have have more solutions to the problems that were driving oil price a few years ago.

But I will be a buyer of oi & gas shares if we get below $54.

crzyhun's picture

The charts were helpful to see intermarket relationships- they are real. Just read J Murphy's book on them.

If there is a bounce economically off the bottom, there will be a play in oil, and utilities too. For now, oil has been up 100% from 35$$. Some take back is to be expected. And, for now the dollar is playing pallsy wallsy with the risk averse. These concerns with sov debt are getting realer. The leverage in them is daunting and hard to resolve- other than coordinated global debt w/off. Hmmm. Not happening.

curbyourrisk's picture

Like I have been saying...and getting beat on for it......

 

Deflation 2.0   here   we   come!!!!!

 

 

Prophet of Wise's picture

Oil is priced in dollars and is moving with the dollar.

Dollar is priced in oil and is moving with oil.

The dollar is a permanent inverse to truth.

Gold is the permanent inverse to the dollar.

Ripped Chunk's picture

"For the last two decades the trend of inflation has been easing"

 

On what planet?  I wish to go there for Christmas. And not return!

Anonymous's picture

What is happening to oil is that it is now tracking the euro, not the dollar. At least it was when the data (link below) was prepared (to sept-09). Would be interesting to see an updated correlation...

http://www.financialsense.com/Market/cpuplava/2009/0916.html

Could this be the canary in the coalmine for eventual loss of world reserve currency status for the dollar?

Fruffing's picture

Nice to see some thinking in this respect.   Generated enough shrill commentary to give the thesis some credence.

Anonymous's picture

The second totally irrelevant oil piece in a row that's been published here.
Try www.crudewire.com From this morning:
WTI in Narrow Consolidation
"Lets pretend your bonus is not being taxed at 50%, or in long vesting stock....you've made a TON short USD / long oil. It's mid Dec., Emerging markets and European sovereign's default risk is screaming up ....it's Fri.
What do YOU do? "

Remus's picture

Any explanation to way the oil service and oil companies don't follow oil down

OSX and XOI has hardly moved while oil has fallen 12-13 %

Anonymous's picture

The price of oil can move down short-term, but many of the shareholders of oil service and oil companies might believe the long-term trend is up and aren't selling much.

I am somewhat in that camp. I took some profits this week, but I am looking to do some bottom feeding in the next 6 months.

Grand Supercycle's picture

 

As mentioned previously, the crude chart is BEARISH.

http://www.zerohedge.com/forum/market-outlook-0

Anonymous's picture

O>K> just to be fair to the writer,he said "the trend of inflation is declining over two decades",and not inflation. In another word,if in the eighties inflation was ,say 7% annually and it became less in the nineties and less in the 2000's then his statement is right(ex:the trend of a rising s&p is declining between Jul and DEC,as opposed to the period of Mar to Jul,but it was rising even Jul-DEC).But of course,depending on official figures to extrapolite dats is becoming kinda tricky these days...

system failure's picture

let me get this right, commodities; oil and gold are selling off with a stronger dollar and equities are rising. With that, oil and gold are worthless and to sell them, and I should be buying equities with a stronger dollar. However, the equities roared when the dollar lost value for 9 months. hmmm...talk about your mixed signals...perhaps, it is a signal.

Anonymous's picture

equities rise in a dollar drop scenario as dropping dollar is basically inflation. So with real rates at zero, where do you put your money to combat the inflation (or deflated purchasing power of you fiat currency)? A company will raise prices to stay in business as costs rise. So long as the business survives, it will rise (inflate) with the overall economy and the drop in the dollars purchasing power.

So long as the dollar keeps going lower against other currencies, and it will, the stock market will go higher as well along with commodities.

Anonymous's picture

Anyone have any thoughts on why RIG and NE have been beaten like a red-haired stepchild and kept in a corner for several weeks?

Clean balance sheets with good backlogs. Could it be because they moved their HQ to Switzerland?

Anyone?

Adjusting tin foil chapeau.

geminiRX's picture

Ummm....has anyone seen Mar 23 calls on UUP. There has been 341,584 options purchased! Carry trade unwinding? If dollar is expected go up, then naturally oil is going to "temporarily falter". Watch out equities!

Anonymous's picture

- fuel, food, housing, commodities and consumables are down tremendously over the last two years. -

Housing is not an indication of the overall economy (massive oversupply).

Commodities are NOT 'down tremendously.' From 2 years ago, oil is up, copper is about the same, gold and silver are up significantly.

From my experience, food and consumables are about the same. The normal price might be a little bit higher but it's a lot easier to find specials offering big discounts.

Health-care and education are UP.

trav777's picture

oil will trade with demand fundamentals until supply declines measurably.

Anyone who looks at the production decline from Cantarell has to be very scared to short oil.  That field alone lost 2mbpd in the last 5 years. 

There is a good field-by-field production analysis by IEA here:

www.worldenergyoutlook.org/docs/weo2008/chapter10.pdf

Time-to-peak and decline rate are measurably worse the more recent the discovery.

Here's an analysis of decline rates too:

http://www.theoildrum.com/node/5979

This analysis suggests a 2.2mbpd decline rate in production annually.  If that is the case, we will be in supply deficit by next year.  I would not short oil with somebody else's money.  Demand will have to collapse materially to adjust.

We need to find fields equivalent to 80+% of currently producing fields in order to meet demand growth necessary for continued economic growth plus the depletion of the existing fields...and all by 2030. 

The dollar will be forced to decouple from oil, period.

DaveyJones's picture

+++

Peak oil, and the fact that we need it to do everything make the market price hard to predict

Anonymous's picture

...happens before 911... ...happens before Iran...
...happens before the capstone is set..
...happens before judgment comes...

Investment has ended, divestment is now short term inversion. What is upon the market is Iran. Adjust for it.
Demand destruction, do to Iran, will offset the spike after. There is a trigger, listen for the click-back dip at the bottom and you will know, as you witness the Eye of Horus rise once Afghanistan is fielded.

This has been a message from B H Obomb's Raytheon adviser.

hettygreen's picture

Yves (if you're reading)

Can you comment on your recent long bond (TLT) chart. Something seems awry as the 30yr yield is decidedly rising. I thought 4.48 (50% retracement from recent low of 3.89 to June high of 5.07) would hold but now looks like .618 retrace is possible if one has any faith in Fibonacci numbers. Are we getting that drop in price you forecast for early 2010 sooner (and sharper) than expected? Seems more than a few bears (Prechter being #1) believe price goes much lower although with the yield curve steepest its been since 1980 (see Mish) short rates should also rise in this scenario? Something has to give and I think it is equities that ultimately lose this game of chicken with the bond market.

Yves Lamoureux's picture

         HettyGreen

 My observation is still that we are in a holding pattern.The specs 

have covered quickly some shorts and it probably created a short term vacuum 

where we drop to close beautifully negative for the year.I have a great post by the way regarding the yearly behavior of bonds that I will put in the new year.The market has done a beautiful job of shaking the tree and only if you have faith in your analysis  should you be rewarded .Oil is on its way under 50$ and does affect money aggregates.It is also a perfect sign of deleveraging and slowing demand.Bonds are slow to react but should take their cues from this.

Happy Holidays

 

Yves

 

 

hettygreen's picture

Thanks Yves

I have faith but you are right about that tree (which I've been in since last July). Really respect and enjoy your analysis and look forward to reading more in the New Year.

 

Happy Christmas to you.