Re: Mike Masters on oil on CBS
Posted by WARREN MOSLER on January 12th, 2009
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(email exchange)
>
> On Mon, Jan 12, 2009 at 11:49 AM, Russell
> wrote:
>
> Very compelling argument. Still believe it is the
> Saudis controlling price?
>
Has to be, within a range of net demand.
Notice their ‘production increase’ right before the big sell off in July?
>
> Makes sense: I remember the Kuwait oil
> minister saying that he could not explain $140
> oil. He was not seeing any new demand to
> drive up price. Everyone said he was lying.
>
> A friend was telling me that there was no
> shortage. In March he was trying to find
> storage along the Mississippi River. There was
> no. All tanks full.
>
Right, never has been a shortage. Just price setting. And the price setters were happy to accommodate the run up until it cut demand, as they were running out of capacity as well.
>
> So today we have global demand declining 1
> million barrels per day.
>
Right, no big deal. Nothing OPEC hasn’t already adjusted for.
The problem has been the inventory liquidation as prices fell. No telling when that has run it’s course. Futures markets are saying not yet, but getting closer to the end.
The Masters Inventory Liquidation is probably the largest inventory liquidation of all time.
Hopefully it leads to pension funds not being allowed to use passive commodity strategies as investments, but not sure it won’t all come back. There’s still a lot of it going on. I’d vote to have it outlawed.
>
> Supply is being cut back. We have the Chinese
> economy tanking. So are we looking at $25 oil?
>
Not impossible until the inventory liquidation has run its course. It took about this long in 2006. I didn’t think it would last that long this time, but the liquidation has been a lot larger than back then.
>
> If so, we are going to see a violent world at a
> time of global economic weakness. Russian is
> struggling, so is Venezuela and Iran. Potential
> uprisings there.
>
Yes.
>
> Here is the USA it is a true blessing. Without
> lower oil prices, we would be a serious
> economic quandary.
>
It’s already pretty serious! While consumers are being helped, the energy related companies have gotten hurt and helped bring stocks down. Lower crude also makes stronger/USD harder to get overseas, so they stop buying our stuff like they were before. Domestics should pick up that slack as their oil bills go down, but there’s a big lag due to rising unemployment general economic disruption.
>
> Who said markets were understandable let
> alone logical.
>
Can’t remember. Probably me!
[top]
January 12th, 2009 at 12:07 pm
Why didn’t Mike Masters mention the Saudis/Russians? Does he buy into your theory that they are hiking prices at the margin?
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January 12th, 2009 at 2:10 pm
Is it reasonable to say that only those with an actual need for commodities be able to trade them?
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warren mosler Reply:
January 12th, 2009 at 2:17 pm
that’s been a good question for a long time. problem is it’s close to unenforceable internationally.
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jcmccutcheon Reply:
January 12th, 2009 at 3:07 pm
That’s a good point. We don’t want to force people offshore. But we can stop institutions? Right? Don’t pensions have gov insurance?
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warren mosler Reply:
January 12th, 2009 at 3:14 pm
yes, we can and should stop our pension funds as Mike suggested.
January 12th, 2009 at 2:15 pm
Jim,
He’s not convinced, and in any case the Saudis have been overwhelmed with the inventory liquidation. The only way a monopolist can stop that from causing prices to fall is to buy their product back, which doesn’t work with crude. Or they could immediately cut production to 0, but they don’t want to make it that obvious, and capping wells is problematic.
But once it’s over they are back in the driver’s seat. Depending on how much demand has been cut, seems they are moving to reduce production at current prices to get the price they want. The question is how much they will lose in sales if they move their prices higher.
Not to mention the Saudis may have wanted lower prices to discourage alternative energy and high cost energy investments. After all, they did increase production just before prices came down, so a lot of the sell off might be their doing.
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January 12th, 2009 at 3:17 pm
So . . . the Saudi’s as price setter argument is like the Fed as interest rate setter, I’m assuming. If you’re the monopoly supplier or swing producer, how can you not be setting price? Like during 1979-1982 when the Fed claimed it wasn’t setting interest rates but obviously was just accommodating a higher level while allowing more variability (which everyone basically admits now was the case). And as you said, easier with the currency to drain excess to support prices than it is with a commodity.
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January 12th, 2009 at 3:25 pm
exactly. simple point of logic beyond dispute
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January 12th, 2009 at 8:13 pm
0 sum game in Futures. Not as if there was no other side to the trade. It was fear of an asset diminishing which bid the market higher and higher irrationally until the net sum was larger than the underlying. Sellers still got there hedge. Remember the irrational run up in gold? similiar sense of fear, inflation, and flight to quality. The speculators provide the hedgers a market… The speculators take on just as much risk as the hedgers. It was a global persepctive that a needed asset was running away and the USA did not control it as much as they used to. Again Supply and Demand proved itself as the best agent of capitalism.
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