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Eric Sprott Was Right — Oil Slump Says ‘No’ to Recovery Story (Sprott’s Thoughts)
Henry Bonner - Sprott Global Resources
Gas prices are some of the highest in the country in San Diego, California, and it still cost me only $2.96 a gallon to fill up my tank last week.
There’s an excess of oil supplies, according to analysts. You can see from the chart below that global oil production has been rising steadily over the last three years.
In our new report, we make the case that the oil decline is not merely a supply issue.
Oil is cheap, but so are copper, uranium, iron ore – all the materials that are used in a growing economy. Increased production of goods and services tends to stimulate consumption of these raw materials.
This recovery isn’t causing an uptick in demand for these metals and energy sources. Hence, copper is near a four-and-a-half year low of $2.661 per pound. Uranium is at $39 per pound, down from $652 per pound in 2011. Iron ore for delivery in 2015 trades below $60 per tonne, down from over $180 per tonne in 2011.3
Instead, we are seeing an uptick in the demand for US stocks, bonds, real-estate, and other assets whose values have been rising.
US stocks have soared by around 100% since early 2011. Corporate buybacks and debt issuances have surged too. US corporations are piling on new debt and buying back their shares. In 2014, S&P 500 companies are estimated to have spent 95% of profits on buy-backs and investor payouts.4
As you can see, stock buybacks have been on the rise since the crisis.
These buybacks are in part fueled by historically low interest rates, allowing companies to borrow cheaply. Around $1.7 trillion in buybacks occurred from 2011 to 2014.5 New corporate debt has increased by around $1.4 trillion during that time – as you can see in the chart below.6
Sustained low interest rates have also boosted the bond market and helped the housing market where the availability of financing for purchases is crucial.
US stocks, bonds, and other assets are getting a lift from low interest rates… We have even seen some jobs growth in the last year. This has fueled an optimistic ‘recovery’ story.
A prevailing narrative is that the US economy is recovering, while other major consumers of raw materials like China and Europe are not. Thus commodities are cheap despite a recovery in the US.
Proponents of this thesis look at higher assets prices brought on by ultra-low interest rates as signs of economic growth. Yet the low interest rates that are driving these price increases are symptoms of a tepid economy. Debt is cheap because investors expect weak inflation, or even deflation, and are rushing to safety.
Eric Sprott wrote in his September note:
While most have been conveniently blaming the tepid first quarter -2.9% GDP growth figure on the weather, we believe it is just another symptom of a much deeper malaise. […] The U.S. economy has been on life support, graciously provided by Central Planners.
[…] The bottom 40% of households still rely heavily on government assistance, have had stagnant incomes and have been faced with increasing inflation for ‘non-discretionary’ goods that constitute a very large share of their incomes.
There clearly is no recovery…
Cheaper oil prices don’t just come ‘out of the blue.’ Other commodities used for raw materials, construction, and economic growth, have been languishing too. And real median incomes remain stagnant since the Great Recession.
These are all signs that the recovery we are seeing is mainly asset inflation brought on by cheap debt, not economic growth.
You can download our full analysis in our new report ‘Oil and Gold: Where Do We Go from Here?’ Click here.
1, 2, 3 - Bloomberg
4 - Bloomberg online: S&P 500 Companies Spend 95% of Profits on Buybacks, Payouts. October 06, 2014
5 - S&P 500 Dow Jones Indices
6- Board of Governors of the Federal Reserve System (US)
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Here in Canada it doesn't matter what the price of oil is. You'll still pay over $1.00 a litre. Perhaps it is the fact that we have too many fucking government assistance programs that cost tax payers a fortune? I notice that price falls verrrrrrrrrrrrrrry slow versus how it rises?
Here in Canada being long Oil is the only way to go. The price was 1.20 (where I live, likely much higher in the bigger cities) when oil was 105.00 a barrel and it is 1.04 (today) now that prices are around $50.00 a barrel. How does that math work anyway? The lowest it got was .87 a litre when oil was around $45.00 a barrel and then it jumped roughly .20 since then.
"Remember, gas theft effects us all"
We have reached the tipping point in the use of oil. We will soon use only a fraction of the oil we are presently using.
Let’s look at some examples of what is happening to demand and learn why demand will not return to its former level nor increase again. Here are some examples of what has occurred, what is occurring, and what will occur in the world of oil:
1.
Every year Boeing builds 700 aircraft. These new aircraft are 20% more efficient than the airplanes they replace. The airplanes being replaced were designed in the 1960s and the 1070s. No airline can afford to fly them any longer as they are severely inefficient by today’s standards. You may view the retired aircraft in the aircraft graveyards.
In addition, airlines are switching from petroleum fuel to a 50/50 blend of bio fuel and petroleum fuel. This results in a fuel reduction of an additional 10%.
This is going to result in a huge reduction of oil consumption.
2.
A similar thing is occurring in the shipping industry. Today, ships are being fitted with what is called an AIR LUBRICATION system. Cruise lines are currently testing air lubrication systems on their ships with outstanding, almost unbelievable results in terms of fuel consumption. RCCL has the system installed on several of their cruise ships and they anticipate that when the system is installed on all their ships they will reduce their fleet fuel consumption by 10%. This will reduce their fuel bill by 10 million dollars per year.
The reduction of fuel consumption for other large ships such as fuel carriers and cargo ships is expected to be as much as 20%.
It takes about two weeks to install an air lubrication system on a ship. Shipyards will soon be filled with ships undergoing system installs. The rush is on.
3.
The automobile industry is constantly improving the fuel consumption of its vehicles. I recently traded in a 10 year old auto for a new vehicle. The old car got 24 mpg. The new car is larger and gets 34 mpg. A total fill up of my new car is now 10 gallons.
Around the world 30 million inefficient cars are replaced every year. That’s a huge ongoing decrease in worldwide fuel consumption.
4.
The trucking industry is doing its part. Look at the 18 wheelers you pass on the highway and take note of the air deflectors attached to the bottom of the trailers. Those air deflectors reduce drag and result in fuel savings of 10%.
How big is this you ask? There are 300,000 18 wheel trucks in the US and Canada. They each drive 250,000 miles per year. They typically get six miles per gallon at highway speed. Do the math and this is a potential fuel use reduction of 125,000,000 gallons per year.
It is truly astounding that a simple and inexpensive wind deflector installed on 18 wheeler trailers will result in a fuel savings of more than $3,750,000,000 each year for the North American trucking industry. When the avoided production and distribution costs of this much fuel is included in the equation the potential annual savings come to $4,000,000,000.
We will all benefit.
5.
The future of oil just became immensely bleaker.
The Lockheed Martin Skunk Works has an unrivaled reputation of producing cutting edge technology on time and under budget. Recently Lockheed Martin Skunk Works announced they will produce a working prototype fusion reactor in less than five years.
See:
http://www.forbes.com/sites/williampentland/2014/10/15/lockhe
ed-martin-claims-fusion-breakthrough-that-could-change-world-forever/
The Skunk Works fusion reactor will eliminate the need for 90% of the petroleum products being produced today.
The world economy based on oil is coming to an end.
"While most have been conveniently blaming the tepid first quarter -2.9% GDP growth figure on the weather, we believe it is just another symptom of a much deeper malaise. […] The U.S. economy has been on life support, graciously provided by Central Planners."
Oh Eric stop being so negative, don't you know that positive thinking is what drives everything!
I think I can fly! I think I can fly! I think I can fly!
only rebound im seeing is my dick between jobs
Well, if Mr. Sprott's "analysis" is true, then it does not look good for his PM funds.
The author is right about what is driving the markets, but how is any of this going to change anytime soon?
I agree with. Mr Sprott but the liberals and the federal Reserve are controlling the market. I'm not a bull at these levels. Will sit back and see if zirp works.
ZIRP will become NIRP. Stop worrying about "prices" and "currencies", neither can be trusted.
You should be thinking about a return of capital now and not a return on capital.
One or two things could easily blow up now, one step away from "war bonds" all over the globe.
interesting times.
NIRP already started at Chase. http://www.wsj.com/articles/j-p-morgan-to-start-charging-some-big-client...
What about sales of virtual reality helmets, you never say much about them ?
Oil price has slumped.....copper and lumber too. i don't know Sprott or his past but it doesn't take a genious to see that this spells slowdown,,,not rebound.
Eric Sprott has been wrong for 4 years. He talks his book.
Wrong for 4 - 5 years? Only a weather guy could get away with that. Ops forgot about Barry.
DOES ANYONE HAVE ANY IDEA HOW MANY REFINERIES ARE SHUTTERED BECAUSE THE FUCKING UNIONS ARE ON STRIKE?
(I'LL BE FUCKED IF SPROTT DOES)
Unlike most talking heads out there, I don't recall Mr Sprott predicting higher rates every other day for six long years.
Last summer and fall Sprott Resources dumped a few hundred million into oil E and P.
Independence Drilling in Texas plucked $50-60 million from Sprott at $11/share- now down around $5-6/ share.
Got to be a long term play.... yeah, right....
You mean to tell me that Gas Prices are not $2.96 per Gallon in San Diego County, California, where I live?
You mean to tell me that all of the data presented here is all fabricated and nothing about it is correct?
That is what is so laughable about people as yourself.
You claim that others are "talking their book" when it is obvious to the causual reader that you are just talking your own book.
Yes you epitomize the psychological phenomena of transference. Wow.
Wish i could be wrong for 4 years and still be a billionaire
Not easy if you're the State of Arizona tho.
They do have coal.
And water.
In theory a lot of copper.
Interesting that they are trying to ban solar power in the State though. "Too much sunshine"? Solar panels give you shade if that's the problem.
As long as the book keepers define "recovery" as increasing rate of consumption of resources and increasing numbers of consumers...
"we don't need no stinkin' recovery"
warm regards,
Earth's other Species.