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Wednesday, October 21, 2009

Crude At 80

Crude inventories and finished good inventories running very high, YoY YTD imports are down 9.1%, total product supplied is down 4.3% YoY YTD. Crude at $80.

Current gasoline stocks are up 7.5% YoY, crude stocks ex-SPR is up YoY 10%, distillate stocks are up 33% YoY. There's a lot of this stuff around:
At 339.1 million barrels, U.S. crude oil inventories are above the upper boundary of the average range for this time of year. Total motor gasoline inventories decreased by 2.3 million barrels last week, and are near the upper limit of the average range. Finished gasoline inventories decreased while blending components increased last week. Distillate fuel inventories decreased by 0.8 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories decreased by 1.4 million barrels last week and are at the upper limit of the average range. Total commercial petroleum inventories decreased by 4.2 million barrels last week, and are above the upper limit of the average range for this time of year.
There's real value and then there's relative value, but we have left either range to go to desperation value (anything but currency).

Natural gas stocks are high too:

Bovespa is nearing its previous high.

Seems like summer 2008 all over again.

It's a spiral--virtuous or vicious, I don't know.

The Fed's printing press leads to buying of commodities, which shovels dollars to foreign buyers, who buy U.S. equities (the final remaining U.S. asset they have faith in), which removes dollars from circulation, which causes the Fed to run the printing press....

Right now, all three links correlate. My guess is that the Fed will not be the link that breaks first. The market will stay up until after commodities break.

Of course, I've been wrong all year, so it's probably best not to listen to me.
Well, I'm wrong. I figured by now Oil would be well below $40 a barrel.

"It's a spiral--virtuous or vicious, I don't know."


In some ways it feels a bit like 2004 to me. I didn't appreciate the spiral then. I don't appreciate it now. I exited stocks and watched them continue on without me (which eventually reversed course in a big way). I then found myself sitting entirely in US dollars and I didn't much care for that either though. Go figure.

So what did I do? I put 1/3rd of my nest egg in physical gold and silver and rode the wave until 2006. It seems so easy in hindsight, but I assure you I was one nervous investor the entire trip!

I'm not willing to play that speculation game this time around though for the very reason you suggest.

"The market will stay up until after commodities break."

I'm a fan of Ensure. I have a craving for milkshakes and it is a healthier alternative. I bring this up because...

Based on Costco's pricing, Ensure hasn't risen a penny since I began hoarding it. Just when I thought they'd have to increase the price, they changed the cases from 24 for $24 to 30 for $30. It was a productivity miracle instead.

So what does it mean? People speak of the oil to gold ratio as being somehow sacred. I don't understand it. We burn oil. We don't burn gold. In contrast, I compare the Ensure price to the gold price and have but one conclusion.

Either Ensure is really cheap right now or gold is really expensive. Or both! Either way, the higher gold's price goes, the more Ensure I want to hoard.

If there was an Ensure ETF that tracked the price of Ensure, I'd be tempted to short the gold ETF and go long the Ensure ETF. Let's just put it that way.

I'm tempted to think that even as bad as our financial situation is, that gold has become a "sure thing" in the minds of many investors. How is that any different from what investors were thinking during the dotcom bubble and the housing bubble?

I've got "stagflationary" in my name and yet I now find myself heckling the very thing I should be embracing with open arms. Financial uncertainty for the win!
Mark, I don't mean to detract from your main point in any way, but...

"Just when I thought they'd have to increase the price, they changed the cases from 24 for $24 to 30 for $30."

I recently went through this exercise with my wife's business. It really opened my eyes.

By increasing the package size, they most likely increased their per-sale profit. Advertising is probably the biggest single line-item in Ensure's cost structure. It takes a certain amount of marketing dollars to get a customer to take Ensure off the shelf. If that customer takes more Ensure off the shelf, the company grosses more for the same advertising spend and stocking fee. It's the same reason restaurants will increase portion size and entree price, rather than making meals the correct size for normal humans and cutting the price. The food (or the Ensure) isn't actually the most expensive thing you're paying for. The expensive part is convincing you to make the purchase in the first place.

Some bright boy in marketing probably looked at their data and figured nobody would shy away from buyng a few more cans of Ensure.

As to your main point: The big difference I see between this run-up and the bull markets in 1998 and 2003 is that in those markets, everybody wanted to make money. Greed was the motivation.

This run-up is driven by the desire to not lose value. Fear is the motivation.
Neil - yes. A defensive bubble also being driven by speculators.
One thing I've noticed around here is that grocery prices have become much more *volatile*. For example, boneless skinless chicken normally sells for $4.99/lb (which IIRC is up from $3.99 about a year ago)...but every couple of weeks, there are sales in which the price is cut to $1.99.

Maybe this is just the local situation (a Safeway and a Giant about a block from each other) or maybe it is awful inventory control on the part of the chains...thoughts?
RE: volatile grocery prices

They are loss leaders. I've somewhat noticed a similar thing. They've raised the regular price, but the sale prices are often the same. If you pay attention, shop selectively, and engage in hedonic adjustments, coupled with the drop in milk prices, groceries aren't the total hammering it seemed like they were headed to.

Heck, Mark will appreciate this one, last week I bought 25lbs of rice for $20. It's weird. Wife bought a big bag last summer ('08) when she went with a friend to Costco and they had a pallet up front with a sign about limit 2. I scoffed at her and even wrote that I thought it was a scam to induce demand. Well, we finally worked through the bag last month. We still had a few cups in the smaller container we measure from, but the "big bag" was gone from the kitchen. I couldn't handle it. Now I need the mental insurance of a big bag of rice in a corner of the kitchen. :-)
$1.99/lb for boneless skinless chicken breasts has been the sale price for years. I won't buy it at above $2.99 a pound, actually (I just buy extra at sale and freeze for later).
Joy - I won't buy above the $1.99 price. I really wonder how much of the recent food price wars are due to consumers just bowing out.
MOM - True, the speculators jumped on, following the foreign inflows.

Another place I've been willing to put money is in tools that can conceivably provide income. For example, my wife needed to do a pre-production run of her product (which she is eminently qualified to do on her own), so I encouraged her to purchase the equipment necessary to do so. She got her batch of product, her business got an asset to depreciate against taxes, and we've got the capability to crank out similar items at home for spare cash, if need be. If government regulations get to be really onerous, there are many classes of consumer goods that will only be available from cottage industry that can fly beneath the radar. Internet marketing makes it straightforward to sell product in whatever geographical region you care to, so if you can make it, you can probably sell it. It's also easy to take advantage of the "buy local" movements, like farmers' markets and craft fairs.

I survived that rice shortage unscathed. I had pre-hoarded, lol. That said, I now hoard twice as much.

Half is for potential price increases as predicted by oil (and gold). The other half is in case my hoarding ways become mainstream and shortages therefore happen again. Sigh.

I love rice and would never want to be forced to pay Safeway prices for it.


I keep roughly 10 cases of Ensure on hand anyway (hoarder!). They really don't need to market to me. I'm probably the exception though. ;)
Joy, MOM.."$1.99/lb for boneless skinless chicken breasts has been the sale price for years"

Not around here..can't remember exactly what the sale price used to run, but it was higher than that.
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