On The Energy Cliff's Early Warning Signal

Tyler Durden's picture

The XLE closed yesterday at 63 - only a buck above the June 1 lows. For the year, XLE is now down a whopping 8 bucks. And of course oil, which started the year at 103 and peaked at 110, has dropped to 78. Jefferies David Zervos offers some critical insight into the energy sector bloodbath in the last few months, which of course begs the question - what in the world is going on? Shouldn't all this accomodative policy by the Fed, ECB, SNB, BoE and BOJ be sending commodities to the moon? The BoJ has been implementing additional QE, the Swiss have been printing francs at a breakneck pace to hold the peg, the BoE just announced the ECTRF (Extended Collateral Term Repo Facility), and Ben just extended the twist for 6 more months. Of course the ECB, as always, has been behind the easy money curve - but all signals point to some action in July: an MRO cut, a depo cut and some relaxation of the collateral lending rules. Maybe we even get another LTRO. So back to the original question; if the worlds' central banks are so easy, why is energy collapsing? And how can gold be unchanged YTD?

[ZH - As an aside - Oil priced in ounces of gold has slipped back to an important level here]

The answer is straightforward - central banks are NOT being accomodative enough. These downward trends in the energy and commodity complex should be a warning sign to anyone with a "price stability" mandate. There is a hefty disinflation trend developing and given the amount of debt in the system - and the weakness of global aggregate demand - any signs of significant disinflation should be cause for grave concern. We cannot mix a lot of debt with a lot of deflation - that will be the end of us!! That is Irving Fisher 101!

And while it may not be "common wisdom" to assert that our global central banks are being too tight, the proof is in the prices. A large sustained drop in energy costs at this stage of the reflationary game is VERY unsettling. It is the surest sign that monetary policy is too tight!

That said, I suspect it will not take much for us to see further action. US headline inflation has a one handle and is falling fast. Europe and UK are most likely in recession. And Japan still has deflation. The central banks have "talked the talk" when it comes to accomodation, but they have not "walked the walk". However, when push comes to shove in this post 2008 world, they always come through.

So while this move in the energy complex is unwelcome news on the reflation front, it does have two important positive side effects. First, as alluded to above, it lowers the bar for more accomodation to support a reflationary recovery. And Second, it has positive supply side effects. Cheaper energy will give a boost to consumer and (non XLE) business sentiment. The supply side implications for this energy drop are very supportive for the growth side of the reflationary equation, particularly in the US. But the positives on the supply side will hardly outweigh the negatives on debt/deflation side given the size of the debts.

For now we should look at this energy cliff as an early warning sign for stress in the system. And as such we should expect the usual central bank backstopping to come out in force if this trend picks up material steam! Its the same old story, reflation or bust - and I'm still betting the central bankers deliver the former! Good luck trading!

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GMadScientist's picture

All the king's horses, bitchez.

Matt's picture

It was the worst case of deflation the world had ever seen. A loaf of bread, which cost $10 on Monday, was $5 on Tuesday, and by Friday could be picked up fresh at the bakery for under $0.50.

By the end of the month, electricity was $0.01 / KwH. You could get a new car for $100, straight off the lot.

After three months, the gold bugs were desperate to swap their gold coins for $20 bills, which was now a good month's pay at a government job, if you could get one. People were cruising around in brand new Hummers, Escalades, and other massive vehicles with gas down to a penny a gallon. We truly thought, at that point, that the world was going to end.

otto skorzeny's picture

I actually saw some d-bag on Kudblow last night saying that with lower gas prices people will be able to return to buying SUVs. rinse-wash-repeat

LowProfile's picture


@ Matt

Gold actually does well in deflation on fears of default, as default leads to PRRRRINNNNTTTTIIIIINNNNGGGG...

Not bullish for PMs, which IMO is fine.  Get ready for the last best chance to buy gold at these price points.

mrktwtch2's picture

its the end of the euro..and i feel fine..

mayhem_korner's picture

Good luck trading!


The only winning move is not to play.  (War Games)

CPL's picture

1) Open trade account window.

2) Transfer funds.

3) Determine there is no uHaul behind the hearse.

4) Hookers and blow.  Party until wild horses drag you away.

5) Do the end of the econmic universe of ponzi-nomics in style.

Hugh_Jorgan's picture

"I'm still betting the central bankers deliver the former!" - Really? Do you?!

This is a ridiculous assertion. The Central Banks have failed to deliver anything but the most epic bubble in the history of mankind using their unlawful mandate from our politicians to erroneously attempt to flatten out the business cycle, and just generally "manage the economy". Their corruption and 3rd-grade fiscal policies have placed the economies of the EU and America into a skid the will finish out with the "slow-motion rollover crash at 65Mph" of an SUV driven by the lady on the phone trying to put on her makeup! 

Why, oh why, would the author think that these clowns can get the system back on track?

aerojet's picture

Dunno.  He lost me when he said that central banks have too tight a monetary policy.  Really?  If an asshole were as loose as their monetary policy you could drive an 18-wheeler through it and still have room for the Dallas Cowboys cheerleaders to march through in full defilade!

DosZap's picture

 He lost me when he said that central banks have too tight a monetary policy

Yep, what he means is they are not loaning to people who NEED it, and the people who do not need it, are not asking for loans.

Also its far more profitable for them to just SIT on it and take that quarter basis point in interest.No chance of loss there.

GeneMarchbanks's picture

The answer is straightforward - central banks are NOT being accomodative enough.

Classic. I'll have the usual, Rene.

flying dutchmen's picture

not accomadative enough....  fuck off .... rates are damn near zero..  What they should really do is just mail every citizen a check for 5k.... at least that way it is fair and everyone gets some benefit.

Hugh_Jorgan's picture

C'mon man, look on the bright side; there is always that "last hurrah" of CTRL-P until we can wipe with 1,000,000,000 bills. Then finish out with another massive, bloody, world war!

mendigo's picture

Glucose drip for the dead patient.
Apparently the CBs are resorting to the combined power of horror and comedy - sort of a global Jerry Lewis marathon.

mendigo's picture

Glucose drip for the dead patient. Apparently the CBs are resorting to the combined power of horror and comedy - sort of a global Jerry Lewis marathon.

LawsofPhysics's picture

Paper is irrelevant, more mental masterbation.  Mixing "debt" and "paper money" terms that are fake made-made bullshit with the realities of thermodynamics and physics.  Bullshit, apples and oranges, print all you fucking want, deflate all you fucking want, the energetic return and the energetic investment WON"T FUCKING CHANGE.

Its_the_economy_stupid's picture

November coming.....no support for energy.

azzhatter's picture

Lower gas prices is all obama's got

LawsofPhysics's picture

load up (gas tank hedging) because it won't last much past November (regardless of the election outcome).

Flakmeister's picture

PBT and PSE are holding a fire sale now...

And Tyler is bang on,  GOR is telling us that oil is a buy.....

mess nonster's picture

They're neck and neck...

Massive hyperinflationary blowup due to CB easy-money policies on the inside,

but...Catastrophic default of entire trading blocs is gaining!

Its_the_economy_stupid's picture

Gas at the pump dropping 1.5% per day.

aerojet's picture

Ever since gas stations got electronic signs, they have been fucking the consumer ever harder.  Morning commute?  Prices up $.20.  Rainy Tuesday?  Prices down $.40.  It's micro-managing demand and they must be using the futures as an indicator, too, because you can sit in the parking lot watching a futures chart and only minutes later the price will change.  It's completely uncoupled from any sensible realistic approach to setting prices.  I need a god damn HFT computer to help me decide when to fill up!

roadhazard's picture

oh no ! it's all about peak oil and supply and demand... my ass.

Tirpitz's picture

Could be the major oil players (GS, JPM et al.) are in for a quick shakeout, to back up the truck anew at a cheaper level.

Or they are seriously facing a cash squeeze, Lehman style. In either case I'd expect the combined central banker tribe to turn the liquidity spigot open wide and long again, and all within days.

r101958's picture

Actually, at this point, commodities are a much better indicator of true economic reality. Also, the difference between equities and commodities is an accurate indicator of the extent to which central banks are propping up the stock market. They can not let the markets fall very far because they have a vested interest in them. However, they definitely can and will see to it that every other investment class suffers. Their goal here is to make it seem that the only profitable investment is in stocks.

Seize Mars's picture

This is Zerohedge. I thought we all knew that "managing to a target" is dumb.

Trying to ascertain what the value of XYZ ought to be, then jacking pices of paper to make it so, is not only silly and ineffectual, it's dangerous.

Everyone knows price control cause shortages. Well Supply controls will cause misery as well.

Stop the paper game, let prices tell the truth!

LawsofPhysics's picture

Come on now, you know that true  price discovery can not be allowed to happen.  TPTB would be bankrupt overnight and would lose power and control - the latter is what this is all really about.

Seize Mars's picture

You're starting to make sense.


nobusiness's picture

God forbid the consumer gets a little cheap gas for his piece of shit 12 year old car and can heat his underwater home for the winter.

John Law Lives's picture

Whoremasters who promote debt to create debt slaves don't want deflation.  The Great Chairsatan hates it.

Sockeye's picture

Somebody went all in on QE3.

bigwavedave's picture

Forgets that China, India and Japan have been the only marginal buyers for years now.

EL INDIO's picture

I said it before and I’ll say it again. The western world CBs are not idiots, in fact they are geniuses in what they do. That is if you understand what their objective is.

They push things in one direction as hard as possible but they stop before reaching breaking point, then they reverse course at full speed.

They pushed inflation as high as was possible without losing control, now they will let deflation do its work for as long as possible and then start again.

Tirpitz's picture

Real deflation would take down ALL of the major banks with their over-leveraged balance sheets. Won't happen in a world where central banks can print money at will.

Deflation on the income side of the working class (aka 'austerity'), however, that is a goal they pursue with fervor.

EL INDIO's picture

I’ll just add that, their only objective is to maintain this system that serves them so well.

DUNTHAT's picture

the sole purpose and function of the Federal Reserve is to serve as a policeman for the Big Banks, so they play nice in the sand box AND promote debt expansion at all costs.

They don't care about anything else.

asteroids's picture

Oil and Gas is still very overpriced. There's a lot more to go.

CommunityStandard's picture

Even if the price of oil plummets, oil companies will still charge the same for gas at stations and pocket the difference.  In 2007, people were constantly complaining about high gas prices at $3.50.  Now, $3.50 is normal.  The oil cartels succeeded in raising the price and making it acceptable, and won't give that up so easily.

Monedas's picture

If you want an omelette .... you have to break some eggs !  If you want some wine .... dirty peasant girls have to dance on the grapes and catalyze the fermentation process with their yeast droppings !  If you want some bread .... you have to beat the chaff out of the wheat ! If you want some gold .... you have to rock the sluice box !  What were we talking about ?       Monedas     1929      Comedy Jihad Cheap Oil Tour

John Law Lives's picture

" If you want some wine .... dirty peasant girls have to dance on the grapes and catalyze the fermentation process with their yeast droppings !"

That gets my vote as the most revoltingly graphic post of the day thus far...

Monedas's picture

I never once referred to the custom in Serbia .... where the girls gather their hems and do sitz squats in the mash ?   Monedas    1929        Comedy Jihad Musings Of An Incurable Romantic

John Law Lives's picture

Well, I suppose dingleberrys from Serbian lasses' arses enhance the flavor of the vino...

Monedas's picture

Exquisitely put ! Were talking the premium hand made wines here .... not the stainless steel tank car stuff fermented en route !      Monedas     1929       Comedy Jihad Longing For Old World Craftmanship

waterwitch's picture

You forgot to mention that Saudi is pumping at near record rates. The reason given for this record pumping is to bury their good buddies, Iran and Iraq, with cheap oil.  Personally, I think the real reason is due to pressure from the Obama administration to keep oil prices low to insure re-electability.  I'm concerned that Saudi has exacerbated the demise of their largest field (Ghawar) with this accelerated pumping.  Just that much closer to the end...

DaveyJones's picture

Yup. All these "tricks" are only accelerating peaks decline

abgary1's picture

This is what debt deflation looks like!

Everything drops!