Excellent little blurb on oil prices

[heaterman]

this is from an investing news letter I read occasionally and the guy is spot on most of the time.

Read it and weep.....


http://www.cumber.com

The TV is crammed with industry folks and analysts calling for the oil price to fall $20 or $30 per barrel. They argue there is a geopolitical risk premium that is part of the current price. They may be right, BUT no one knows how to measure a “geopolitical†risk premium. We can only guess at it.

Market forces set prices. We see them in the oil market for various types of oil and for various maturities in the futures markets. Those prices are all well above the $70-$80 range. As Dennis Gartman points out well in his daily letter, the futures market tells you the expected cost of holding an oil inventory in actual storage vs. using a financial instrument in place of the physical storage. If you go by the markets, the outlook for oil is well above $70-$80 and headed higher.

Various estimates of global oil demand center on 88 million barrels a day for 2011. In some excellent research Barclays assembles the outlook for oil from four key sources. Barclays also runs longer-term supply/demand analysis on a global basis and then projects the oil price.

Barclays estimates that the oil price can be about $185 by the end of this decade. It can be $135 within a couple of years. This is without a supply shock that may result from current violence in MENA. In addition, we add, it is without any supply shock originating in Nigeria or other Sub-Saharan African oil sources.

We remain overweight oil and energy in our US exchange-traded fund portfolios. The current weight of the energy sector in the S&P 500 index is about 13.5%. We are about 20%, which is about as high as we would go with a sector this large. We remember that the energy sector reached nearly 25% of the total market weight when the Shah of Iran fell in 1980 and the oil price then spiked to $30 a barrel. We also remember that the sector weight fell to as low as 7% when oil plunged in price to as little as $10 per barrel a few years ago.

The key to oil is to be nimble. You can buy it and hold it forever or you can change your weight, depending on richness or cheapness. When the energy sector is priced as a single-digit percentage of the US market, it is cheap. When it is above 20%, it is richly priced. Currently we are in the middle.

Oil and energy is currently neither cheap nor dear. Therefore, the pricing of the stocks in this sector depends on the outlook. Here the information is available and the outlook for US companies remains positive.

The US is dependent on imports of oil. We get it mostly from ten countries. Dennis Gartman reports the sources in his letter today. They are listed by size of imports: 1. Canada 1.972 million barrels per day, 2. Mexico 1.140 bpd, 3. Saudi Arabia 1.080 bpd, 4. Nigeria .986 bpd, 5. Venezuela .912 bpd, 6. Iraq .414 bpd, 7. Angola .380 bpd, 8. Colombia 338 bpd, 9. Algeria .325 bpd, 10. Brazil .254 bpd

Since global oil is priced in US dollars and is likely to be priced that way for a long time, the issue for a US investor is the dollar price discovery and how that will unfold. MENA violence aside, it is clear that the US dollar price of oil is likely to go up.

Some of that “up†will be due to weakening currency. Some of it will be due to rising global demand. Some of it will be due to the absolute failure of the US ENERGY POLICY WHICH MAKES US DEPENDENT ON FOREIGN-SOURCED OIL. And some of it will be due to the supply shocks from geopolitical risk in MENA and elsewhere.

The total of these things suggests that the upward price bias estimated by Barclays is a correct thematic view for an investor. At Cumberland, we remain overweight the energy sector. As we have written several times: “This is nowhere near over.â€

~~~

David R. Kotok, Chairman and Chief Investment Officer

 

[flyingcow]

The idea oil will be cheaper in the future is mind boggling. Some believe that.

That was a good article.

Glad it pointed out who we get oil from. Won a few dollars betting with people on who the top 3 suppliers of our oil are.

 

[heaterman]

The part of that brief that makes my blood boil is in the second to last paragraph regarding US energy policy. It is absolutely true and there is so much that could be done to change the way we produce, transmit and consume energy in this country. The problem is that doing so involves changing habits and entrenched ways of doing business; of everyone from energy producers and government all the way down to how people think about driving, turning on a light, or heating and cooling their homes.

I'm beginning to think that a graduated tax on energy consumption that drives energy costs higher along with elimination of current subsidies that distort the true cost of the way we do things, phased in over 10 years, is the only method that will force the needed changes to be made. There is just too much inertia involved in maintaining the status quo to effect any meaningful improvements in our energy balance of trade unless not doing so becomes more "painful". (seems like dad called that self discipline) ...... Sad to say but one way or another these changes and costs will become apparent and be forced upon us one way or another. We might as well face the music and get going on it ourselves while we still have some control over how it is done.

The issue is mainly one of conservation and thinking about the true life cycle cost of everything we buy along with the way we do things. I'm going to wander off here and do some in my head, think while you type calculation.......might be messy.........

Looking at total life cycle costs for a subject near and dear to all of us here (burning wood) is revealing and says a lot about how we think in this country. Take the average Joe who is buying a wood boiler. He sees XYZ outdoor wood boiler company selling a product for about $8,000 installed. It'll burn green wood he is told so he doesn't have to put all that time into seasoning and stuff like that. He buys it and burns 20 cords of wood per year to heat his house.
The boiler, if he gets industry average life out of it, lasts about 8 years and then fails. Now he has the $8,000 invested in the first place + the cost of 20 cords of wood per year along with a few pumps and other normal maintenance items added to his initial cost. That drives the total expense up an additional $2,000 per year for a annual cost of about $3,000. Where is the savings in that. (I'm making the assumption that a full cord of wood costs $100 even if the wood is "free".....it's not) The guy has spent $24,000 and countless hours of time for nothing. Along with the fact that his OWB burped out literally tons of emissions that are toxic to him and his neighbors that live within a mile or so. But Hey! It was way cheaper than that new fangled high efficiency boiler. Right?

Let's look at that and see. Let's say he buys a good grade boiler like an EconoBurn, Tarm or a Garn and invests $18,000 including storage for the system. Any one of those three will go 20 years and the in the case of the Garn many are closing in on 30. Let's use 20 as an average and assume (realistically I might add) that his wood use is going to be 10 cords per year with any of those 3 boilers. Now his cost per year is $1000 for wood plus $900 for the amortization of the boiler and installation. So it's $1,900 per year actual life cycle cost giving a total of $38,000 over the life of the boiler.

The guy in the first scenario has to buy 2-1/2 OWB's over that 20 year span so it cost him $8,000 the first time, $10,000 the second time (assuming normal inflation 8 years later) and we'll guess at about $6,000 for half the cost of the third boiler he has to buy. So he has $24,000 invested in the boiler(s) over the 20 year period. Now add 400 cords of wood @ $100 per cord and you see his fuel cost him $40,000 or $2,000/year. He now has a total of $64,000 invested in heating his home for 20 years or $3,200 per year. Buying the "cheaper" boiler with the "cheaper" underground tube and burning the "cheaper" wood cost this poor sap an additional $1,300 per year.

It's that kind of thinking that got us into the energy mess we are in and reversing it is going to be tough. Frankly, it won't happen until the "pain" of making poor choices gets to be higher than the pain of making long term decisions. Think of it this way on a national scale. What would happen to our budget deficit and our trade deficit if we could cut our energy costs in this country by $200 billion annually. Within 10 years those deficits would be gone and the biggest "tax" ever on the American people would disappear. Whodathunkit

Moral of this little exercise: Lowest first cost is seldom the lowest life cycle cost.
I'm not saying this holds true in every case but after playing with this stuff for the last 15 years I think my assumptions are pretty accurate.

Bah....I'm ranting again.....gotta get to work. Time to hit the send button.

 

[Fsappo]

Someone must of farted someplace. Market shooting up again. Maybe because Korndaffy is winning?