Monday, January 5, 2009

4 + 1 Market Overview

This site spends a lot of time discussing the big-picture macro-economic trends that make economies run and prices move. I structure it this way on purpose, as there are ample opportunities to get the micro-level stuff (current prices and inventory levels) from other media outlets. Living in the Internet age, information is everywhere - but I have always found it difficult to find a report or site with a big collection of the best information, one robust enough to give me thoughtful angles on the market without being biased or talking a position.

With this as a backdrop, I decided to create my site. I now post and link to subject matter from economics, finance, and the commodities markets for my readers' benefit. The challenge becomes how to take these separately posted, uniquely written, and disparately opined articles and weave them together in a way that makes sense for a business person - someone who does not have the time/interest to dig as deeply as I choose to do.

So the 4+1 market overview is becoming that thing - the way to stitch it all together. What follows is half a market analysis and half an explanation of what appears on this site:

The 4 things that matter most to the market:

1) The Domestic Economy:
I am hoping that Punxatawney Phil finds a re-run of Entourage on his home TV, because we need some new luck in this country. Since last February, when things still seemed eerily normal, the wheels have come off the domestic economy. President Elect Obama has neat plans to cut taxes and support infrastructure re-investment, but the government is quickly running out of ways to stimulate the economy. The first step was monetary policy - but now the fed funds rate is zero. The next step is fiscal policy - like the tax cut and works programs. The final step is called "Praying to God." The US economy is the biggest consumer of energy in the world, and when we cut back on consumption it affects storage surpluses everywhere. Expansionary monetary policy is supposed to work (with the negative side effect of nasty inflation after the fact) but we have never actually lived through a mess this unique and gnarly.

2) Other Folks' Economies:
Iceland went bankrupt. A prankster even put it (the entire sovereign nation) on eBay. The starting bid was 5 cents. As one of my best friends might say "All God's Children Gots Problems." The Eurozone has aggressively cut rates, and China has cut 6 times in 4 months. Workers in China are reversing the migration - out of the cities and back to the farms - because there are no surplus jobs. The entire "disconnected" world joined up for one big trip into the financial-economic sewer in the last Quarter of 2008. Crude prices will not rebound 'till we begin to see signs of improvement in key economies around the world.

3) Geopolitical Noise:
The problems in Gaza are just like the song "Auld Lang Syne." Everyone knows the familiar refrain, but few know what it means. And here come militants bombing pipelines in Chad and Nigeria, too. And Russia is having a spat with the Ukraine. Of all of these, the Russia/Ukraine thing holds the most latent bullishness. Should the situation become a protracted stalemate, Western Europe may need to step into the market to buy cargoes of heating oil to run power plants in the short term. My post on the Wizards of Oil helps folks dispel the belief that rogue states like Iran might do something drastic with oil exports. These governments need the cash from oil sales badly to keep their economies from heading over the brink.

4) Inventories:
Distillates and Gasoline are around their 5 year averages, but there's a whole lot of crude out there. The this glut of supply was created (at least in part) by the term structure of the crude curve - enticing folks to lease storage and sell the forward months against an inventory position. Rallies will be inhibited by this physical length until we can consume our way through the surplus.

+1) Plus the One thing that no one cares about right now (that maybe they should):

The marginal cost of production for new fields is reported to be around $61-$65. This might help explain the current contango in crude futures (where the front month is steeply discounted to forward months). With crude values at current levels planned production is being pushed out and production that has recently come on line is hemorrhaging cash for its developer. At some point, economies will grow again (China must stay above 5% GDP growth to avoid recession because they are creating that many new skilled workers every year). When this growth occurs, it will create demand for energy, and this demand will meet a stagnant supply growth projection. Hello, higher hasn't been near long enough...

The next time I post a 4+1 it will be a video post. (I have always wanted to be in pictures. - Not!) Quite the contrary, creating a vlog is intimidating to me - but I think that some folks learn by reading and others (maybe the majority) would prefer to hear the information. So...Mr. Demille, I am ready for my closeup.


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