Rational Advisor

One of the major reasons we are seeing higher Canadian dollar and Canada doing so well is due to the rapid appreciation in Oil.

Crude oil prices have been at all-time records this month and markets seem to be convincing themselves that the once-unimaginable level of $100 per barrel may soon be achieved. Momentum is now behind this, and we may well see as in other momentum periods the march to some magical number. The market seems to have a mind of its own at this stage, and only something Ëœseismic’ could force prices down. The momentum is so strong, like riding on a galloping horse, that the oil market will not stop accelerating before we get close to $100.

While organizations such as the International Energy Agency warn that demand for oil will increase in the fourth quarter, many observers think the demand forecasts are overstated. Demand for gasoline is actually falling, the U.S. Energy Department says. Domestic oil inventories are at high levels by historic standards.

Speculators have been lured to the crude market by the falling US dollar, which makes dollar-denominated oil futures a bargain to overseas investors, and profits that can be made arbitraging various oil contracts.

The cost of insuring against a spike to $100 before the end of the year has surged almost 400 per cent in the past two weeks.

investors buying protection through the options market risked creating a self-fulfilling prophecy. Oil goes up and more people buy insurance. More people buy insurance and sellers of that insurance buy oil in the futures market [to hedge their risk], forcing oil up further.

As if Bush and his cronies were not profiterring enough from the price of Oil, the White House recently announced new sanctions against Iran, the second largest OPEC producer, targeting the international arm of the country’s powerful Revolutionary Guard and the country’s largest bank. Apparently they think they can find WMD in Iran, I mean they didn’t find them in Iraq

Condo-lies-alot Rice, US secretary of state, and Hank Paulson, Treasury secretary, called for other countries and international financial institutions to follow suit. “These actions will help to protect the international financial system from the illicit activities of the Iranian government,” Ms Rice said. Who will protect the world from the illicit activities of the Bush regime? Sounds a lot like what they said at Sadam’s time. Didn’t they also start with sanctions! And WMD that did not exist!

In spite of record prices, OPEC, which supplies more than 40 per cent of the world’s crude oil, reiterated on Thursday that the market was well-supplied.

“There is no interruption of supply. There’s a lot of oil in the market”, said Abdalla El-Badri, OPEC’s secretary-general.

However, the White House said on Friday that oil prices were a concern and warned that supplies were tight. Me thinks the white house has another agenda! So, how is it that the White house is saying something completely counter to what the suppliers are saying. OPEC says there’s more than enough OIl, the US inventory guys says there’s more than enough OIl in the US, and yet the White House says there’s not!! Hmmm who’s zooming who!

“Oil prices are a concern across the board, we have very tight supply and we have growing demand, and not just from our country,” said White House spokeswoman Dana Perino. She added: “We do believe that oil prices are way too high.”

Chakib Khelil, Algerian energy minister, said: “The high prices are not coming from a lack of production.” Venezuela echoed those comments.

There are growing signs that Saudi Arabia, the cartel’s leader, will push for further production increases after the calls from the US and China. Ahemmm, even more Oil coming!

The falling U.S. dollar has also played a role, as oil worldwide is priced in dollars.

Oil producing nations have less incentive to ramp up output if the buying power they receive per barrel is declining, and foreign consumers have less incentive to reduce demand if oil is, relatively, getting cheaper for them.

The effect of high oil prices in the 1970s is notorious. They twice led to severe recessions in the developed world and equity bear markets. Why has nothing similar happened yet in the current surge in oil prices?

New research by Veronique Riches-Flores of Société Générale suggests the market has not been foolish in shrugging off higher prices so far. But it also suggests much more appreciation in oil prices would be hard to bear. She uses the concept of the “oil burden” - the volume of oil consumed multiplied by the average price and divided by nominal gross domestic product. This gives the proportion of the world economy devoted to buying oil.

On this analysis, oil was very cheap in the late 1990s and in this decade before the invasion of Iraq triggered the long-term rise in crude prices. (Ah-ha she also agrees that the move was due to a move into Iraq).

If prices are sustained at around their current levels, or even move forward to $100, then, she says, the most recent trends in crude oil prices might be more difficult to absorb.

With the reference price for OPEC at $81, it is 45 per cent higher than a year ago. At the end of the second quarter, worldwide nominal GDP had risen only 13 per cent. That puts the “oil burden” on a path to its highest level in more than a decade.

With the recent gains, the price of oil is closing in on the inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today.

Some analysts argue that the underlying fundamentals don’t support such high prices, and say speculative buying is the real reason prices are rising. Tim Evans, an analyst at Citigroup Inc. in New York, noted that supplies remain high by historic standards. Also, OPEC is set to boost production by 500,000 barrels a day beginning Nov. 1.

“What we’re seeing … is rising supply and relatively weak demand,” Mr. Evans said. He believes oil’s “true value” is closer to $65 a barrel!! Please note Canada!

As a note the World consumes about 85-million-barrel daily.

What does this all mean - It means that this market is manipulated, that there is a lot of Oil out there. it means that Canada is artificially buffered up, we may have the best fundamentals when it comes to GDP etc, but we only make up 3% of the worlds GDP! - all this gain has happened on the backs of commodities. It also means that a surprise can happen at anytime. One of th elessons I learnt from the last crash was not to play with the fire called momentum, not to chase what is hot - have a discipline, and even in tough times stick to it.

After a while it seems ridiculous to stay with a philosophy that has not seemed to have worked over the last three years, and we capitulate to what is working. We switch from sound investing to techology investing in 2000. Then we realize too late that we jumped onto the wrong thing. The only problem is hat the wrong thing has been right for so long, that it’s convinced us that it is the right thing.

Rational

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