Self-Fulfilling Prophecies and their Impact on the Market

Self-Fulfilling Prophecies and their Impact on the Market

by | published June 22nd, 2012

Yesterday’s cave-in hit the energy sector proportionally harder than the markets as a whole, as had been the case with other triple-digit downturns over the past six weeks.

Yes, there was a pullback coming.

No, there are no fundamental reasons why it should have been as deep as what we have experienced.

Of course, the doomsday predictors are as loud as ever. But lately there’s a hollow ring in their rhetoric.

The justification for the more than 20% dive in crude oil prices has a bit of circular reasoning behind it.

“The decline in demand has resulted from the excess amount of crude oil on the market,” they chant, almost in unison. “And the excess supply is causing the decline in demand.”

We could certainly turn to manipulation of the futures market by those playing major across-the-board shorts, or the curious “phantom barrels” that have been showing up in inventory figures globally.

But I am not interested in this morning’s latest conspiracy theory. The short players have been successful in depressing the price of oil and making money in the process. These same folks will be attempting to make money by jerking the price upwards once the floor hits.

Right now, we are significantly oversold in both the futures price and in the energy sector as a whole. That is setting the stage for a rebound, and it will take only a tiny spark to ignite.

Maybe that “spark” will be the collapsed talks between the “Big Six” and Iran, now guaranteeing the EU boycott of Iranian oil on July 1.

Or perhaps it will be recognition of the strange fact that, despite the widespread assumption from the talking heads on TV that stockpiles of oil products are way too high (many of these being the same guys shorting the market as soon as they leave camera range, by the way), refinery capacity utilization is much more elevated than would be warranted.

Or perhaps the actual OPEC and International Energy Agency (IEA) global demand figures may finally sink in; they point to the highest per-day average crude oil usage in years.

Yes, both agencies have cut their projections from earlier in the year, but they are still indicating more than a 1.5% rise in overall worldwide consumption in 2012.

Right now, we are approaching less than four million barrels of surplus capacity internationally. Virtually all of it is Saudi. Oh yes, and access to virtually all of that would require passage through the Strait of Hormuz.

And that brings us back to the accelerating crisis with Iran.

July 1 is Approaching Fast

Given the sanctions already in place, Tehran has had difficulty processing currency exchanges for the crude it can sell, reducing the revenue flow.

With world prices diving, they are in an even more desperate situation. (Some 90% of Iran’s budget is financed by oil sales proceeds.)

Some in Iran have openly suggested they may obstruct the two-mile wide strait in response.

(And that may be soon.)

On July 1, not only will Iran lose 24% of its monthly exports (the amount that normally goes to Europe), it will also face additional sanctions that would penalize insurers, bankers, and shippers trafficking in Iranian oil.

When the major Chinese insurer declared recently that it would no longer cover Iranian consignments for Chinese shipping companies, the country that had been Iran’s dominant oil trading partner suddenly fell to number two (India is now leading). This development is of serious concern to Iranian authorities.

All of this will be hitting the market shortly. And there is little that the short artists can do about it but ride the price upwards on the other side of the trades.

Still, emphasizing suppressed demand and lowering the price not only makes the sanctions harsher (remember, the ultimate objective here is to steer Iran away from its nuclear ambitions), it also buys Brussels some time to figure out how to overcome the shortfall in imports.

But that would bring us back into the realm of artificial manipulation – this time for political reasons – and yet another conspiracy theory.

The Prophecy is Wrong

There is one way in which this self-fulfilling prophecy is just dead wrong. It is not simply a misapplication of data. It is simply flat-out incorrect.

Commentators continue to talk about volume coming on line. In other words, not only is demand sluggish, but there is a considerable amount of new supply available to further depress the price.

The problem is simply this. The supplies they refer to are either reaching their infrastructure limits (shale oil in North Americas, where a considerable amount of midstream capacity needs to be constructed to move it to the western and eastern portion of the continent, where imbalances persist), or they will not be flowing for three to five years.

This is not readily available additional supply. It is, at best, future supply.

Commentators will bring up major fields like Kashagan off Kazakhstan, the largest find in the last 40 years. Yet there will be no volume of consequence entering the market from the field until 2016 at best.

Then there is much optimism about improving export figures to come from Iraq. Baghdad has signed a series of important contracts with international majors to ramp up production at existing fields. Once again, however, that volume is not coming next month (as the pundits would have you believe), but is still several years off. And there are major problems with getting the new oil out of the country without constructing expensive export faculties.

Remember, all of these expenses are passed on to the consumer.

Throughout all of this, the global usage figures will continue to advance as more areas feed a need to develop.

There is also one other result of the current low prices. Reduced prices for oil and oil products have always occasioned more usage of them.

That means, as the price goes down, the rise in demand assures the prices will be going back up.

We will have a period here of subdued prices, but the prophecy of impending doom is hardly warranted. Think about it. For a justification of low prices to remain, the proponent must conclude a significant worldwide recession (or worse) is assured.

I don’t know any bear east of Yellowstone who really wants to argue that. It results in the cruelest of ironies.

Gasoline prices will decline to the level that people can finally afford to fill up the SUV.

Of course, when they get in, they no longer have jobs to drive to.

Seems to me we have been there before.



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  1. eric taylor
    June 22nd, 2012 at 13:29 | #1

    Doomsday worries are only half right, and often serve the many short
    term traders who propagate them, in my opinion. Partisan political
    commentary is full of scare tactics, which might partially explain
    why a majority of Republicans have overactive fear parts of the brain.
    The media deregulation, mixed with more technical business
    oriented education, along with all of the blather going a round
    would worry anyone! The irony is that our current debt situation
    is more strongly embedded in the history of the Republican side of the aisle.

  2. June 22nd, 2012 at 13:46 | #2

    I signed up to Oil and Energy Investor to get Dr. Kent Moors’ advice. I enjoy reading and acting on his advice, even though I have yet to profit from it, but is the advice I get limited unless I also sign up and pay for Energy Sigma Trader?

  3. Bob
    June 22nd, 2012 at 14:01 | #3

    Hi Kent:y leads to

    I agree with your prediction that low priced crude leads to increased demand, and eventual rebound in crude price. I’m wondering if you still recommend the BNO call option? A price of $95 for Brent by Oct. looks like a stretch from here.

  4. David Swan
    June 22nd, 2012 at 14:49 | #4

    Thanks for keeping us in the loop of what’s really going on! The reassurances you email out are a pleasure to receive.

  5. June 22nd, 2012 at 15:32 | #5

    This nonsense of short selling and futures in commodities which are essential to the preservation of the global way of life in virtually all nations should be outlawed.

    I personally do not, nor do I know anyone who does, want the price of my energy manipulated by capitalizing on the fears of others purely for their own profit. This type of behavior is nothing less than a crime against humanity and must be stopped one way or another…

    As for your comment above …Gasoline prices will decline to the level that people can finally afford to fill up the SUV. Of course, when they get in, they no longer have jobs to drive to…

    Pretty much nonsense in America where I live as well. Companies are hiring faster than ever when they can find the workers to do the jobs they need done. Businesses are selling more non-essential products than they have in the past 4 years because consumers now have an extra $50-$100 a week to spend that they were spending on essential fuel. You can literally see the economy start to reboot everywhere around you and the small business owner knows it. I have a friend who owns a small business and since gas started going down his business is making more and more every week and has actually become profitable during the slowest time of the year for that industry.

    Talk your own special brand of doom and gloom if you want but I see better times for everyone except oil resource holders the further the price of oil drops. And frankly, few other than that small clique of already richer than anyone ever needed to be give the slightest bit of a hoot if they never make another dollar of profit during our lives!

    Spoken by an economist….not a investment advisor or resource broker.

  6. Steve
    June 22nd, 2012 at 15:48 | #6

    Upon hearing nearly the same crap in early Sept ’08 when Texas sweet was at 118, I held out till the third week of 9-08 when the price hit $108 then went all in, right from my money market, 3 days before Bush insured money markets.

    The US economy, unemployment, debt, China, Japan, Brazil, India, and Europe were all far better off then than now. Transportation technology, natural gas and reserves are far better today than then. Also, today the public tolerance for austerity is much higher after being pumped for $5 gas all winter and spring. Oil fell to $35 in March ’09 then rose. Metals were even steeper in recovery. I hung on, then got out at $110. Fool me once shame on you. Fool me twice…… So I and everyone I know now drives 40 mpg vehicles. New Ford models are claiming 100+ mpg unlimited range. My new fridge cut my electric bill 70% despite a 15% rate hike. Auto chassis will very soon be printed from poly carbonate lattice structures. Most products will be printed rather than shipped. Organics can also be printed. 10 years from now oranges will be printed rather than grown. All new electronics today consume a fraction of energy than the best did in 2008 with further stunning efficiencies soon to be realized.
    A second economic dip is coming despite QE(X). The more QE, the greater the dip. When the Fed and Europe finally exhausts QE, I honestly can see oil hitting <$20 within 5 years. Cheap energy or slavery are the only engines for real economic growth. Energy or labor prices must ratchet down before prosperity can happen and be sustained. I believe decreasing energy prices through technology will be the means to prosperity rather than slavery. Meanwhile technology just keeps happening. Oil's day as a fuel is passing away more because of cost than for environmental reasons.

  7. Dick
    June 22nd, 2012 at 21:27 | #7

    Mr Moors: Question 1: Are some of the OPEC members concerned that, their chosen one in the Oval Office (although he’s not there often) might loose the fall election, especially if oil prices had remained high. It seems coincidental that as soon as Obama mentioned something (a month or so ago) about taxing the oil company(s) profits, etc., the prices started to come down….Question 2: When LNG starts shipping gas offshore, what company will be furnishing the tanker/vessel ships to transport the gas? Would it be a company to consider investing in?
    Regards Dick

  8. Gary Dais
    June 22nd, 2012 at 23:23 | #8

    Eric: Irony, no way. Obama and the Dems increased the Nat’l Debt by 50% in less than 1 term; Bush in 2 terms? 2 terms under the Dems we’ll have completely destroyed the working middle class. Like India?

  9. Karl Shaffer
    June 23rd, 2012 at 10:50 | #9

    When any government spends 35% or more of the country’s GDP, that country is doomed. The US has been overspending and running deficit budgets since the days of FDR. 80 years of overspending and deficit budgets has finally reached its culmination point-> bankruptcy. It is amazing that they have been able to pull off this ponzi scheme for so long, but our politicians have been the consumate flim-flam artists. During most of this time, the spend-o-crats have been in charge. In addition, during Democratic administrations import taxes were removed by NAFTA treaties and giving Most-Favored-Nation status for China, which savaged millions of American jobs, and caused massive trade imbalances. Federal budgets have been a lie for years, as there has never been an acrual for the cost of government pensions and promised health care coverage for retirees. Further, there has never been any accounting for government liabilities in insuring the SBA, Fannie, Freddie, Sallie, student loans, etc. These liabilities exceed the national debt by a factor of ten or more. When the Republicans finally got a crack at the reins, they tried to slow the run-away spending train by cutting taxes, but could not control exploding entitlement costs. In addition, they were hit by dot-com crash, the 911 crash, and the housing debacle. Now, the Democrats are trying to blame the Republicans for the damage that 80 years of fiscal mismanagement by the Democrats has caused. It won’t fly, Mr. Taylor. We have spent other people’s money to the point of annihilation and the result will be a grueling depression. We will be lucky if we can even keep nation intact. Government promises will be broken, just like they broke their promises to the Indians. Think you are safe with a government pension? Ha!

  10. john young
    June 24th, 2012 at 12:49 | #10

    Please correct me if I’m wrong , but didn’t all this crazy world nonsense sort of start after the urging of the big money boys and the urgent needs of the Military / Industro officials , and the unwarranted attack on some country that was supposed to have ” Weapons of Mass Destruction ” then Afghanistan !!
    …. How many trillions did that eventually cost us all…….? And to add to all that .. The massive jobless numbers in the country , brought on by the short sighted greed that exporting factory jobs and manufacturing to China .. Go figure , because it doesn’t take a brain surgeon to analyze it , for me and many of my friends
    anyhow .

    John Young

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