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Howard Marks On "The Lessons Of Oil"
Select excerpts from the latest note by Oaktree's Howard Marks "The Lessons Of Oil"
The following list is designed to illustrate the wide range of possible implications of an oil price decline, both direct consequences and their ramifications:
- Lower prices mean reduced revenue for oil-producing nations such as Saudi Arabia, Russia and Brunei, causing GDP to contract and budget deficits to rise.
- There’s a drop in the amounts sent abroad to purchase oil by oil-importing nations like the U.S., China, Japan and the United Kingdom.
- Earnings decline at oil exploration and production companies but rise for airlines whose fuel costs decline.
- Investment in oil drilling declines, causing the earnings of oil services companies to shrink, along with employment in the industry.
- Consumers have more money to spend on things other than energy, benefitting consumer goods companies and retailers.
- Cheaper gasoline causes driving to increase, bringing gains for the lodging and restaurant industries
- With the cost of driving lower, people buy bigger cars - perhaps sooner than they otherwise would have – benefitting the auto companies. They also keep buying gasoline- powered cars, slowing the trend toward alternatives, to the benefit of the oil industry.
- Likewise, increased travel stimulates airlines to order more planes – a plus for the aerospace companies - but at the same time the incentives decline to replace older planes with fuel-efficient ones. (This is a good example of the analytical challenge: is the net impact on airplane orders positive or negative?)
- By causing the demand for oil services to decline, reduced drilling leads the service companies to bid lower for business. This improves the economics of drilling and thus helps the oil companies.
- Ultimately, if things get bad enough for oil companies and oil service companies, banks and other lenders can be affected by their holdings of bad loans.
* * *
To give you an idea about how events in one part of the economy can have repercussions in other economic and market segments, I’ll quote from some of the analyses I’ve received this week from Oaktree investment professionals:
- Energy is a very significant part of the high yield bond market. In fact, it is the largest sector today (having taken over from media/telecom, which has traditionally been the largest). This is the case because the exploration industry is highly capital- intensive, and the high yield bond market has been the easiest place to raise capital. The knock-on effects of a precipitous fall in bond prices in the biggest sector in the high yield bond market are potentially substantial: outflows of capital, and mutual fund and ETF selling. It would be great for opportunistic buyers if the selling gets to sectors that are fundamentally in fine shape . . . because a number of them are. And, in fact, low oil prices can even make them better.
- An imperfect analogy might be instructive: capital market conditions for energy-related assets today are not unlike what we saw in the telecom sector in 2002.
As in telecom, you’ve had the confluence of really cheap financing, innovative technology, and prices for the product that were quite stable for a good while. [To this list of contributing factors, I would add the not-uncommon myth of perpetually escalating demand for a product.] These conditions resulted in the creation of an oversupply of capacity in oil, leading to a downdraft. It’s historically unprecedented for the energy sector to witness this type of market downturn while the rest of the economy is operating normally. Like in 2002, we could see a scenario where the effects of this sector dislocation spread wider in a general “contagion.” - Selling has been reasonably indiscriminate and panicky (much like telecom in 2002) as managers have realized (too late) how overexposed they are to the energy sector. Trading desks do not have sufficient capital to make markets, and thus price swings have been predictably volatile. The oil selloff has also caused deterioration in emerging market fundamentals and may force spreads to gap out there. This ultimately may create a feedback loop that results in contagion to high yield bonds generally.
Over the last year or so, while continuing to feel that U.S. economic growth will be slow and unsteady in the next year or two, I came to the conclusion that any surprises were most likely to be to the upside. And my best candidate for a favorable development has been the possibility that the U.S. would sharply increase its production of oil and gas. This would make the U.S. oil-independent, making it a net exporter of oil and giving it a cost advantage in energy – based on cheap production from fracking and shale – and thus a cost advantage in manufacturing. Now, the availability of cheap oil all around the world threatens those advantages. So much for macro forecasting!
There’s a great deal to be said about the price change itself. A well-known quote from economist Rudiger Dornbusch goes as follows: “In economics things take longer to happen than you think they will, and then they happen faster than you thought they could.” I don’t know if many people were thinking about whether the price of oil would change, but the decline of 40%- plus must have happened much faster than anyone thought possible.
I said it about gold in All That Glitters (November 2010), and it’s equally relevant to oil: it’s hard to analytically put a price on an asset that doesn’t produce income. In principle, a non-perishable commodity won’t be priced below the variable production cost of the highest-cost producer whose output is needed to satisfy total demand. But in reality and in the short run, strange things can happen. It’s clear that today’s oil price is well below that standard.
It’s hard to say what the right price is for a commodity like oil . . . and thus when the price is too high or too low. Was it too high at $100-plus, an unsustainable blip? History says no: it was there for 43 consecutive months through this past August. And if it wasn’t too high then, isn’t it laughably low today? The answer is that you just can’t say. Ditto for whether the response of the price of oil to the changes in fundamentals has been appropriate, excessive or insufficient. And if you can’t be confident about what the right price is, then you can’t be definite about financial decisions regarding oil.
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And if you can’t be confident about what the right price is, then you can’t be definite about financial decisions regarding oil."
Translation : Shut the hell up and sit down.
I wonder how much this guy gets paid to say nothing, but take a long time doing it?
Howard Marks should stick to writing grocery shopping lists. Useful information is totally absent in this boring pontification on the economy.
Yep. Total mental masturbation.
Doubtful that anyone in this thread has produced a level of investment profits even in the same universe as Mr. Marks. Common sense is obviously not very common.
WTF People pay this guy so he can tell them the obvious
It's a Big Club and you ain't in it BITCHEZ
would be great to have an article on ZH on how the big banks manipulate oil through derivatives...they did yesterday but it could have been more explicit
the lessons of oil: all markets are manipulated
finding price is for free markets, find a free market and let me know..otherwise fuck off..sick of these games and sick of the reptiles that love power and wealth above all else.
If you are not paying attention to geopolitical events behind the price of oil, you are missing a very big part of the picture:
John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.
The Saudis did something similar in the mid-1980s. Then, the geopolitical motivation for a move that sent the oil price to below $10 a barrel was to destabilise Saddam Hussein’s regime. This time, according to Middle East specialists, the Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria.
Turning on the oil spigots comes at a cost. The Saudis, like all other producers, have become accustomed to oil above $100 a barrel. The Arab spring in Libya and Egypt raised fears that the political unrest would spread. Oilrevenues financed higher public spending, so Saudi Arabia needs the price to be above $90 a barrel to balance the books.
But a bit of pain is acceptable. The Saudis are gambling that they can live with a lower oil price for longer than the Russians and the Iranians can, and that therefore the operation will be relatively short-lived.
There is no question that this new manifestation of cold war muscle is hurtingRussia. Oil and gas account for 70% of Russia’s exports and the budget doesn’t add up unless the oil price is above $100 a barrel.
http://www.theguardian.com/business/economics-blog/2014/nov/09/us-iran-r...
Bull Fucking Shit! Oil was never ever ever ever above $90 until you slick assholes manipulated the price in 2007. Now, after only a few years of artificially high prices, these countries can't "balance the books" as you say. How in the fuck did they manage it the rest of the century? Stop being an asshole, because it just makes you sound like an asshole; asshole!
Oil was never ever ever ever above $90
The world price of oil, which had peaked in 1980 at over US$35 per barrel ($100 per barrel today), (Wiki)
some truth can be found on both sides of the discussion...
fact: OECD countries had asked for and worked with OPEC countries to stabilize the price of oil
fact: for a period of around 1980-ish to 1990-ish, this goal was achieved with an average price of roughly US$ 20-25 bbl
fact: ICE trading cartel formed in 2000; founding members included BP, Shell, Total, Morgan Stanley, Society General, Deutsche Bank and Goldman Sachs
fact: ICE had control over Europe's supply chain as well as the contract swap desks at ICE (of course) and NYMEX (now CME)
ICE introduced volatility into the market and successfully broke the ~US$ 24 bbl oil level that had been enjoyed by OECD countries for years... this was done through control of the Brent index and Euro supply chains just as Brent was entering peak conditions... London loophole you name it... what you've been seeing since around 2004 or so isn't a spike in demand, it was a spike in *stockpiling* as part of supply chain manipulation... all of this is unwinding now with regulators and producers flooding the market...
Mother Morgan became a huge stockpiler, Goldman Sachs invested in pipelines, and the producer members of ICE control the vast majority of refinery capacity for Brent crude...
the funny part about all this... OPEC / Saudi Aramco never had any concerns about raising production to meet demand and keep prices steady, but the damn ICE vultures controlled the Brent index... it was a pricing free-for-all, contango trades, you name it... this is how you get institutional investors and sovreign hedge funds to buy into the notion of "omg we're running out of oil peak oil peak oil" when in reality the world is swimming in the stuff...
recall that big meeting in Davos where BP chief Tony Hayward started braying about omg peak oil? all the Euro producers backed him but the Saudis called him out as being full of shit... well, we see who's right now don't we, the Saudis will have us drowning in the stuff by the time they get done making their point... all the stockpiling done by the US (WTI) and China is going to stop while the Saudis pump the ever living shit out of everything... all the other OPEC members and any oil-based economy (*cough* Russia) has no choice but to pump with them because they need the money and market share, they have no choice but to race to the bottom...
everyone keeps saying "it can't go lower"... they said that at $80, then $70, then $60, now we're knocking on $50... one of these days they'll be right, but I wouldn't be so sure on betting a target at this point...
News headline in 2004 dejavue all overagain..only this time russia says go for it::
"When Fadel Gheit first warned of his "nightmare scenario" that Saudi Arabia's main oil export terminal at Ras Tanura could be wiped out by terrorists, he was dismissed as an alarmist.
It was the week after the September 11 attacks in New York, where he is based. But the oil analyst began to think there was another target that would have an even more devastating impact if hit.
As fears of upheaval in Saudi helped set world crude oil prices to 21-year highs of $42.45 per barrel ahead of an Opec ministerial meeting today, there were fewer willing to scoff at Mr Gheit.
"I cannot think of any more logical target for terrorists. It [Ras Tanura] is the nerve centre for the Saudi oil trade but also for global exports. If you can blow up the Pentagon in broad daylight, then it cannot be impossible to fly a plane into Ras Tanura - and then you are talking $100 [per barrel] oil," he says"
notice price of oil in 2004 $42.25/b...
I didnt know terrorists had precision guided stuff
Flight school in Florida...
The oil price drop merely offsets the large rise in HC costs. Notice it occurred the same time insurance companies began releasing cost increases for HC. Had the price of oil stayed the same, there would be a substantial decrease in discretionary $ for consumers and companies would be reporting higher overhead. Why noone is waking up to this seems strange.
Basically, we have managed to tread water at best.
<<< oil is priced to perfection
<<< it's just another way to sheer, rape, plunder, and repeat it all over again by unowho
To all the people who think we can just grow our way out of this or that you can count on predictions from government looking ten or more years into the future you are wrong. To all the people who think the worlds surging population will not become a problem because of new energy sources I say, wake up! Anyone with even the slightest mechanical knowledge will tell you that solar panels, wind mills and such take a lot of energy to build and often are maintenance intense.
Both these complicated systems have a short lifespan and require a great deal of energy to be expended in just keeping them up and running. Carry no illusions the days of cheap energy are behind us and not only has the low hanging fruit been picked it has been eaten. Sadly, if we look back we will see much of this energy was allowed to go to waste. The article below looks into the cost of failing to plan long-term and questions if collectively mankind is incompetent.
http://brucewilds.blogspot.com/2014/12/does-peter-principle-apply-to-mankind.html
My thought, lower oil cost to sustain ZIRP and unload 2014 retail inventory by shredding margins. Then start January 1, 2015 Cap & Trade mandate to recoup lost retail sales margins by raising higher gas prices.
The same old intelectually bankrupt drivel "you can't know". BU11 $#IT!
You CAN know.
$100 + oil leaves nothing left over for financial extraction in the economy therefore lockup and tanked economy.
$60 or less makes too much production uneconomical and tanks the economy.
Welcome to Pee Coil....BITCHES!
Yeah, I found this a bit stupid to say (if you're looking to impress your customers):
That they didn't lump the US (and Canada) in with the others susceptible to dropping oil prices would kind of suggest that they either are serving propaganda or that they are fucking stupid.
And, no mention of the positives for the trucking industry? (mention for the airlines)
How have I played all this? I traded in my old econo-car for an "newer" (never new) even more econo-car (diesel- diesel because I'm of the thought that the trucking industry will be one of the last ones to go): I also switched my wife over too, so now she's getting double the fuel mileage that she had been getting. Time will tell if my "macro forecasting" got it right...
If $100 oil crashes the world economy, is that priced high enough for ya asshole?
The value of "something" is not an issue to take lightly. Value is not a constant and can be derived from several factors such as how liquid a market is, supply and demand or utility value, things can spoil or become obsolete making where you invest very important.
Value is not as constant as many people think or always destined to rise. I have discovered that when you start buying things at ten cents on the dollar your money begins to go a long way. This is a lesson many people may soon learn, or maybe not. The article below delves into how values constantly shift.
http://brucewilds.blogspot.com/2014/05/value-and-worth-constantly-change.html
The lesson is the old rules still apply
Norwegian Companies Continue To Supply Russian Oil Rigs
Exxon Sees Abundant Oil & Gas Far Into Future…..What Happened To Peak Oil?
Cheaper Oil Could Be a Gift for Big Energy Companies – Baron’s
E.U. Member Signs Big Oil Contract With Russia
Russia’s Rosneft Buys Into French Oil Refinery
U.S. Chevron & Russia’s Lukoil Enter In Joint Project In Nigeria
"Exxon Sees Abundant Oil & Gas Far Into Future…..What Happened To Peak Oil?"
"Peak Oil" is a theory, a theory based on actual reality of us living on a finite planet. Further, it was about peak PRODUCTION.
Keep in mind that many of the contracts are at the mercy of political whims/meddlings, that any amplifications of the war drums will ax any such contracts faster than you can say "I'm fucked."
Council Bluffs, Iowa... less than $2.00/gallon at one of those box stores that also sells you gas.
That didn't take long, did it. Question is will the frogs be more likely to leave the boiling water this time around?
This is like watching our Negro President refilling his EBT card. Just like clockwork.
Obama signs $1.1 trillion spending bill into law
Castro Is Free At Last 'Thank God Almighty'
/sarc
I fear for the Cuban culture and people...........The Tribe will absolutley destoy Cuba........
The Wall St. carpetbaggers will arrive and begin sucking the blood out of Cuba with EASY CREDIT. They have been isolated and longing for the trappings of middle class consumption for so long, I fear they will take the bait hook, line and sinker.
For 43 straight months, the ZIOcons weren't in a desperate gambit to back Putin into a corner, and try to save their shitty currency monopolies.
Factor that shit into your idiot charts.
"We just don't know" ~ BWAHAHAHAHAHAH!
Yeah, in 2007 we DIDN'T KNOW that central bankers, in response to Lehman, would nuke the entire global financial system. [But I guess we should have figured ~ given the track record].
As corporate America is chomping at the bit to be let free in Cuba Shepard Smith takes a moment to reflect.
Obama's Ends Cuba's Sanctions- NSA agent has been released for a Muslim terrorist Cuba prison inmate. Fuck off Obama.
Lost DNC votes for 2016. Obama needs to replace all the old 1950’s cars with new banking NIRP green car loans. Climate change bullshit.
Price discovery for oil = price discovery for the markets. Can't do it. Both are highly manipulated.
Globalist are crafting the house of cards. It will fall on a whisper of wind.
So oil runs modern industrial states. The impact isn't felt in oil but in the "industrial backing" behind high powered economics. In other words you have to overlay this COLLAPSE in prices with the collapse in metals prices too.
Read up on your Karl Marx and just how expensive the Kapital costs for mass production of anything is. Sustaining the price and sale of one thing (a car comes to mind) makes the price of that car drop over time but more importantly drops the cost over time too.
This appears possible with even "big ticket items" like aircraft and perhaps even "spacecraft.". You commoditize space launch systems and that opens up literally infinity to your product line.
Good luck with pricing if that happens. Will make the industrial revolution look insignificant....
Interesting thoughts. There is no 'right' price for anything. The market decoupled from middle east risk and added huge supply with smaller demand. You don't have to get too technical.
otdon.blogspot.co.uk
With the cost of driving lower, people buy bigger cars
Not when they are already behind in their 84-month financing of their current car, which is parked in the garage of a house that is in foreclosure.
No shit. It's like this guy doesn't get out in the real world. As I noted above, no "pluses" mentioned for the trucking industry? New flash: it's DIESEL that runs the world, not kerosene (that all the jet setters use to haul their asses around to a bunch of fancy meetings where they put on display their pathetic knowledge of how the world works).
Consumption takes money. They've got us whittled down to just enough to keep us fed and housed (most of us, at least). Not sure where they expect us to come up with the FRNs to buy useless shit anymore.
This is so ridiculous. Should the price be higher, or lower. I don't have a fucking clue but send me my retainer for this fantastic piece of analysis I just wrote.
"It’s historically unprecedented for the energy sector to witness this type of market downturn while the rest of the economy is operating normally".
Economy operating normally. LMAO> This is NORMAL? What a joke this article is.
If sales are languishing, your price is too high.
If you can't keep product on the shelves, in the pipes or on the market, your price is probably too low.
It isn't rocket science. My parents, for a time, made a marginal living running a small convenience mart. It was not a high profit margin venture, but it did teach me a number of life lessons during my high school years.
Walk into a mirror Janet Yellen, Central Banks, IMF, Central Planning, UN, World Bank, and Bank of International Settlements.
Tell Vatican Pope Francis, communism is not the Global motive. Remind him that all dogs don’t go to heaven. Especially a Pope who is a corrupt dog.
Ministry Messiah
As opposed to equities, for which a true and intrinsic value is knowable...
Connect the dots---this smells of consolidation of all the tax payer funded operations.
These goliaths have plenty of cash to wait out the fallout ---exxon-baker hughs-bp-saudis- etc etc--the mental midgets in DC
do not have a clue as to what will transpire--hmmm what happened in the banking (ponzi) industry, housing industry, farming industry
etc etc.
Discoveries paid for by the taxpayer-holes already drilled--land grab for pennies on the dollar--what a set up.
Play accordingly
http://en.wikipedia.org/wiki/Baker_Hughes
That's why its called a "MARKET" Howard; you know risk/reward? Pure and simple dumb ass.
www.traderzoo.mobi
Oil will stay low until one of the three major producers in this Mexican Standoff blinks: Saudi Arabia, Russia, or the US Frackers.
Shouldn't it be...the LEESONS of oil?
Glass-Steagall