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FTO and ASH are two more. They are hit by the double whammy of higher input prices and shorts playing the crack spread. It's hard to build one, but the existing ones have expanded capacity. The competition will heat up in a couple of years as the Saudis and others complete new refineries. I don't like this sector. The VLO CEO is smart. He is selling refineries.
Good calls. Agree on the SA miners, too many problems and production is declining. AUY is in the right places and increasing production at the right time.
Gold has broken above the 910 resistance that has held recent rallies. The miners have some large short positions. I'm playing some of the larger ones long today, AUY, PAAS, and looking at some juniors that will take off if this move keeps going.
I'm neither a utopian nor a marxist. Both groups have had ample time to demonstrate consistent failure. Money and intelligence flow to the places were they are most free. It looks like another generation has to learn that again.
ZZ Price controls don't work. They never have. China has subsidized their prices and they have wide spread shortages. Now the communists are moving toward free market pricing to alleviate shortages. That's pretty damn ironic.
Diesel is a fungible commodity and the US already exports several million barrels each month. We compete with the world and our currency is falling in value which gives everyone else an advantage. China increased their diesel imports 916% for the period of Jan - May 2008.
Try to limit the price here and the product will go elsewhere.
No Free Lunch, Part 3 of 3: Proof
by
Ugo Bardi & Dale Allen Pfeiffer
http://www.fromthewilderness.com/free/ww3/012805_no_free_pt3.shtml
No Free Lunch, Part 2: If abiotic oil exists, where is it?
by
Dale Allen Pfeiffer
http://www.fromthewilderness.com/free/ww3/011205_no_free_pt2.shtml
No Free Lunch, Part 1:
A Critique of Thomas Gold's Claims for Abiotic Oil
by
Jean Laherrere
edited by
Dale Allen Pfeiffer
This is a technical read.
http://www.fromthewilderness.com/free/ww3/102104_no_free_pt1.sht
ml
Abiotic Oil: Science or Politics?
By
Ugo Bardi
www.aspoitalia.net
[Ugo Bardi is professor of Chemistry at the University of Florence, Italy. He is also member of the ASPO (Association for the study of peak oil). He is the author of the book "La Fine del Petrolio" (the end of oil) and of several studies on oil depletion.
Ugo Bardi offers a simple assessment of the abiotic theory. His logic is so clear, and the culmination of his argument is so cogent, that even a child could understand it. And the conclusion is inescapable - at least to honest enquiry - abiotic theory is false, or at best irrelevant. -DAP]
OCTOBER 4, 2004: 1300 PDT (FTW) -- For the past century or so, the biological origin of oil seemed to be the accepted norm. However, there remained a small group of critics who pushed the idea that, instead, oil is generated from inorganic matter within the earth's mantle.
The question might have remained within the limits of a specialized debate among geologists, as it has been until not long ago. However, the recent supply problems have pushed crude oil to the center stage of international news. This interest has sparked a heated debate on the concept of the "production peak" of crude oil. According to the calculations of several experts, oil production may reach a maximum within a few years and start a gradual decline afterwards.
The concept of "oil peak" is strictly linked to a view that sees oil as a finite resource. Several economists have never accepted this view, arguing that resource availability is determined by price and not by physical factors. Recently, others have been arguing a more extreme view: that oil is not even physically limited. According to some versions of the abiotic oil theory, oil is continuously created in the Earth's mantle in such amounts that the very concept of "depletion" is to be abandoned and, by consequence, that there will never be an "oil peak."
The debate has become highly politicized and has spilled over from geology journals to the mainstream press and to the fora and mailing lists on the internet. The proponents of the abiotic oil theory are often very aggressive in their arguments. Some of them go so far as to accuse those who claim that oil production is going to peak of pursuing a hidden political agenda designed to provide Bush with a convenient excuse for invading Iraq and the whole Middle East.
Normally, the discussion of abiotic oil oscillates between the scientifically arcane and the politically nasty. Even supposing that the political nastiness can be detected and removed, there remains the problem that the average non-specialist in petroleum geology can't hope to wade through the arcane scientific details of the theory (isotopic ratios, biomarkers, sedimentary layers and all that) without getting lost.
Here, I will try to discuss the origin of oil without going into these details. I will do this by taking a more general approach. Supposing that the abiogenic theory is right, then what are the consequences for us and for the whole biosphere? If we find that the consequences do not correspond to what we see, then we can safely drop the abiotic theory without the need of worrying about having to take a course in advanced geology. We may also find that the consequences are so small as to be irrelevant; in this case also we needn't worry about arcane geological details.
In order to discuss this point, the first task is to be clear about what we are discussing. There are, really, two versions of the abiotic oil theory, the "weak" and the "strong":
- The "weak" abiotic oil theory: oil is abiotically formed, but at rates not higher than those that petroleum geologists assume for oil formation according to the conventional theory. (This version has little or no political consequences).
- The "strong" abiotic theory: oil is formed at a speed sufficient to replace the oil reservoirs as we deplete them, that is, at a rate something like 10,000 times faster than known in petroleum geology. (This one has strong political implications).
Both versions state that petroleum is formed from the reaction of carbonates with iron oxide and water in the region called "mantle," deep in the Earth. Furthermore, it is assumed (see Gold's 1993 paper) that the mantle is such a huge reservoir that the amount of reactants consumed in the reaction hasn't depleted it over a few billion years (this is not unreasonable, since the mantle is indeed huge).
Now, the main consequence of this mechanism is that it promises a large amount of hydrocarbons that seep out to the surface from the mantle. Eventually, these hydrocarbons would be metabolized by bacteria and transformed into CO2. This would have an effect on the temperature of the atmosphere, which is strongly affected by the amount of carbon dioxide (CO2) in it. The concentration of carbon dioxide in the atmosphere is regulated by at least two biological cycles; the photosynthetic cycle and the silicate weathering cycle. Both these cycles have a built-in negative feedback which keeps (in the long run) the CO2 within concentrations such that the right range of temperatures for living creatures is maintained (this is the Gaia model).
The abiotic oil-if it existed in large amounts-would wreak havoc with these cycles. In the "weak" abiotic oil version, it may just be that the amount of carbon that seeps out from the mantle is small enough for the biological cycles to cope and still maintain control over the CO2 concentration. However, in the "strong" version, this is unthinkable. Over billions of years of seepage in the amounts considered, we would be swimming in oil, drowned in oil.
Indeed, it seems that the serious proponents of the abiotic theory all go for the "weak" version. Gold, for instance, never says in his 1993 paper that oil wells are supposed to replenish themselves.1 As a theory, the weak abiotic one still fails to explain a lot of phenomena, principally (and, I think, terminally): how is it that oil deposits are almost always associated to anoxic periods of high biological sedimentation rate? However, the theory is not completely unthinkable.
At this point, we can arrive at a conclusion. What is the relevance of the abiotic theory in practice? The answer is "none." The "strong" version is false, so it is irrelevant by definition. The "weak" version, instead, would be irrelevant in practice, even if it were true. It would change a number of chapters of geology textbooks, but it would have no effect on the impending oil peak.
To be sure, Gold and others argue that even the weak version has consequences on petroleum prospecting and extraction. Drilling deeper and drilling in areas where people don't usually drill, Gold says, you have a chance to find oil and gas. This is a very, very weak position for two reasons.
First, digging is more expensive the deeper you go, and in practice it is nearly impossible to dig a commercial well deeper than the depth to which wells are drilled nowadays, that is, more than 10 km.
Secondly, petroleum geology is an empirical field which has evolved largely by trial and error. Petroleum geologists have learned the hard way where to drill (and where not to drill); in the process they have developed a theoretical model that WORKS. It is somewhat difficult to believe that generations of smart petroleum geologists missed huge amounts of oil. Gold tried to demonstrate just that, and all that he managed to do was to recover 80 barrels of oil in total, oil that was later shown to be most likely the result of contamination of the drilling mud. Nothing prevents others from trying again, but so far the results are not encouraging.
So, the abiotic oil theory is irrelevant to the debate about peak oil and it would not be worth discussing were it not for its political aspects. If people start with the intention of demonstrating that the concept of "peak oil" was created by a "Zionist conspiracy" or something like that, anything goes. In this case, however, the debate is no longer a scientific one. Fortunately, as Colin Campbell said, "Oil is ultimately controlled by events in the geological past which are immune to politics."
--------------------------------------------------------------------------------
1 Thomas Gold, of Cornell University, has been one of the leading proponents of the abiotic oil theory in the West. The theory, actually, had its origin in the work of a group of Ukrainian and Russian scientists.
http://www.fromthewilderness.com/free/ww3/100404_abiotic_oil.shtml
Consider that it will take years to increase Iraqi production, if all goes well from now. They need everything from rigs to pipelines to skilled labor. Those things are in short supply. So it will take time to cut contracts, mobilize equipment, find and ship the steel, valves etc. Meanwhile, the world is burning 30 billion barrels per year and that number is rising.
US gulf production increases this year will almost cover the decline in Mexican imports.
Demand, Depletion, decline, discovery and development are variables in a math puzzle. So is time. T. Boone can do the math.
Careful, somebody will accuse you of being a satanic oil hyper. ;)
We can shift our cars to natgas. The natgas has to come out of electricity generation, so we need solar and wind to fill in that gap. Clean coal, new nukes and new technology in cables and turbines have to be put on a fast track. Today the biggest obstacles are congress and local governments still stuck on NIMBY and BANANA.
Nader has always been entertaining. His ignorance of markets in general and oil and energy specifically, should provide some fun during this election cycle.
The world produces 85 million barrels per day of oil and natgas liquids. The world is burning close to 87 million barrels per day. OECD inventories are declining as the difference is coming from storage.
Last week, the EIA reported : "U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.6 million barrels from the previous week. At 302.2 million barrels, U.S. crude oil inventories are at the lower boundary of the average range for this time of year." Since we import 10 million barrels per day, this storage capacity is just 30 days of cushion. We normally add to inventories at this time of year.
Tomorrow, Platts projects another 2 million barrel draw.
Stay tuned...
The EIA says in last week's report: "U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.6 million barrels from the previous week. At 302.2 million barrels, U.S. crude oil inventories are at the lower boundary of the average range for this time of year." We are drawing down storage at a time of the year when we normally add.
So if the market is well supplied, why are the OECD inventories falling?
T. Boone has some ideas...
http://tinyurl.com/5zjevl
U.S. facing $60 bln in transmission line costs
Experts peg wind power line cost at $3 bln a year
By Steve Gelsi, MarketWatch
Last update: 12:46 p.m. EDT June 17, 2008NEW YORK (MarketWatch) -- Texas billionaire and wind energy developer Boone Pickens said at a hearing in Washington Tuesday that the U.S. is exporting about $700 billion a year to feed its oil addiction, as he joined the call from energy leaders to use nuclear, natural gas, coal, wind, biofuels and solar to wean the country off imported crude.
According to the Department of Energy, an investment of $60 billion in new transmission capacity is needed between now and 2030 to enable wind power to supply 20% of U.S. electricity.
The cost would amount to approximately $3 billion per year, a modest addition to the $8 billion that has been spent in recent years on transmission infrastructure, said Don Furman, senior vice president of business development for Iberdrola Renewables, the world's largest wind energy worldwide.
"This is a small price to pay given the plethora of benefits that would result from reaching the target," Furman said.
Advocates pointed out that wind energy would reduce greenhouse gasses, create jobs and help the U.S. reduce its dependence on foreign oil.
"We have the best wind in the world. It's time we got serious about using it," Pickens said at the U.S. Senate Committee on Energy and Natural Resources, which held a hearing on building transmission lines to remote areas where giant wind turbines are being built.
Pickens said it's possible for the country to meet 20% of its energy needs from non-fossil fuel sources sooner than the government target of 2030.
Pickens said natural gas could be used more frequently to fuel cars and trucks as promoted by his firm, Clean Energy Fuels (CLNE:clean energy fuels corp com News, chart, profile, more
If less natural gas is available then to generate electricity, wind can take up the slack, Pickens said.
"The large, flat, open areas with adequate wind are usually located a long way from where electricity is needed," Pickens said. "Since we can't do much about where nature has put the wind, we have to do something about transmission to move the electricity to market."
Kevin M. Kolevar, assistant secretary for electricity delivery and energy reliability for the U.S. Department of Energy, said by the year 2030, U.S. electricity consumption will increase by nearly 30% from the 2006 level.
"If you want to support clean energy, you have to support transmission expansion in appropriate areas," Kolevar said.
Kolevar praised the Western Renewable Energy Zone (WREZ), a project launched by the Western Governor's Association, to pave the way for more transmission lines.
The group held its first meeting late last month, with a goal of transmission line construction within the next three years.
"We believe the WREZ will ultimately serve as a model for any region interested in promoting the rapid and responsible expansion of clean and diversified energy," said Richard Halvey, program director for energy, for the Western Governor's Association.
Don Furman, senior vice president of business development for Iberdrola Renewables, the world's largest wind energy worldwide, said the company is planning to invest $8 billion by 2010 in U.S. wind energy, assuming that Congress acts to further extend renewable energy tax credits.
Steve Gelsi is a reporter for MarketWatch in New York.
Options expiration week, crude futures expire Friday, serious econ data, my rules say go to cash every night during options expiry. At least I can sleep, lol.
It's a wild sector. I do best playing it with long swings. Day by day requires sea-sickness pills.
DRYS is up 5 bucks. Navalier just might be a good fade.
Reliance to Raise Crude Oil Imports From Saudi Arabia (Update2)
By Nesa Subrahmaniyan
June 17 (Bloomberg) -- Reliance Industries Ltd., India's biggest company, is increasing crude oil imports from Saudi Arabia as it seeks to secure supplies because of rising demand for fuels in India and the rest of Asia.
Reliance, based in Mumbai, is boosting purchases by at least 90,000 barrels a day, accounting for 30 percent of Saudi Arabia's output increase of 300,000 barrels a day this month, P.M.S. Prasad, president of the company's oil and gas business, said in a telephone interview.
The refiner, building a second oil refinery that would make it the world's largest by this year, stepped up imports after Saudi Arabia's Oil Minister Ali al-Naimi said last month the kingdom is raising output to meet demand from customers. Demand for fuels in the Middle East and Asia is forecast to rise 25 percent to 39 million barrels a day in 2015 from 2008, consultant FACTS Global Energy said today in a report.
``We have been assured of the additional barrels,'' Prasad said yesterday.
Reliance operates a 660,000 barrel-a-day refinery at Jamnagar in Gujarat, and would start operations at a 580,000 barrel-a-day plant under unit Reliance Petroleum Ltd. later this year.
Refiners in Japan and South Korea are poised to increase crude oil imports in the coming months after annual plant maintenance peaked this month.
``There's an abundant supply of heavy crude but the Saudis are more savvy than others in marketing their crude,'' said Harry Tchilinguirian, senior oil market analyst at BNP Paribas SA. ``There's also a seasonal element to this as refiners return from maintenance.''
Heavy Crudes
Saudi Arabia, the world's biggest oil producer, and the most influential member of the Organization of Petroleum Exporting Countries, pumps a variety of light and heavy crudes. OPEC, which supplies about 40 percent of the world's oil, hasn't been able to rein in prices, which rose to a record $139.89 a barrel in New York yesterday.
Reliance Chairman Mukesh Ambani earns more compared with overseas rivals by processing cheaper, dirtier crude with high- sulfur content. His plant is located two days away by ship from the Middle East.
Reliance earned $15.50 from processing a barrel of oil into fuels in the quarter ended March 31, compared with $7 for a plant in Singapore, the company said April 21.
China, the world's biggest energy user after the U.S., has increased crude oil imports from Saudi Arabia 17 percent this year to almost 10 million tons as new refineries start operations, according to customs data.
To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net
Last Updated: June 17, 2008 00:40 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKUFfEn.WHa4
China Jan-May Diesel Imports 2.89 Million Tons, Up 916.5%
6-16-08 1:44 AM EDT
SINGAPORE -(Dow Jones)- China's diesel imports for the January-May period totaled 2.89 million metric tons, up 916.5% from a year earlier, preliminary data from the General Administration of Customs showed Monday.
China's diesel imports for May reached 700,000 tons, around 34 times higher compared with a year ago.
In May, China imported 338,572 tons of gasoline, compared with none a year earlier. Its gasoline exports for May fell 67.4% on year to 160,000 tons.
The country imported 530,000 tons of kerosene in May, up 27.4% on year, while fuel oil imports for May rose 17.1% on year to 2.86 million tons.
http://tinyurl.com/67mgp8
China Jan-May Diesel Imports 2.89 Million Tons, Up 916.5%
6-16-08 1:44 AM EDT
SINGAPORE -(Dow Jones)- China's diesel imports for the January-May period totaled 2.89 million metric tons, up 916.5% from a year earlier, preliminary data from the General Administration of Customs showed Monday.
China's diesel imports for May reached 700,000 tons, around 34 times higher compared with a year ago.
In May, China imported 338,572 tons of gasoline, compared with none a year earlier. Its gasoline exports for May fell 67.4% on year to 160,000 tons.
The country imported 530,000 tons of kerosene in May, up 27.4% on year, while fuel oil imports for May rose 17.1% on year to 2.86 million tons.
http://tinyurl.com/67mgp8
Brownout- Forbes.com June 30 issue.
http://www.forbes.com/forbes/2008/0630/038.html
OutFront
Brownout
Mark P. Mills 06.30.08, 12:00 AM ET
What happens when you don't build more power plants? Get ready for spiking electricity rates, brownouts and even blackouts as demand soars
If you think runaway oil prices are upsetting, just wait for what's in store for electricity. Similar forces are in play. Demand is rising fast; supply is not. The cost to get coal and natural gas out of the ground is going up, and to that expense must be added the cost of the carbon permits that Congress and the presidential candidates are contemplating. Environmentalists are getting power plants scotched. China is sucking up energy. Leave such dynamics in play long enough, and price spikes in electricity follow. But that's just the beginning. We may be facing brownouts (voltage reductions) and even rolling blackouts.
more....
Slippage is already appearing. Instead of a 500kbpd increase and 10 million total, now it's less.... 9.7 million per day.. watch this develop. Tanker trackers are not seeing increases to the U.S. yet. It takes weeks to move those things. The quality of the additional Saudi crude is not light, sweet either. The headline price is determined by light sweet grades, not the heavy, sour grades.
RIYADH, Saudi Arabia (AP) -- Saudi Arabia plans to increase its oil production by 200,000 barrels a day next month, the kingdom's oil minister told U.N. chief Ban Ki-moon on Sunday, according to Ban's spokesman.
The U.N. secretary-general met with Oil Minister Ali al-Naimi in the port city of Jiddah during a one-day trip to the world's largest oil producer.
Farhan Haq, a spokesman who is traveling with Ban, said in an e-mail that the U.N. chief said al-Naimi told him Saudi Arabia would increase oil production by 200,000 barrels a day from June to July. In May, the kingdom increased its production by 300,000.
By July, production should be at 9.7 million barrels a day, Haq said.
DryShips Inc. to Hold an Investor Day Conference on June 16, 2008 in N.Y.C .
June 13th, 2008, ATHENS, GREECE - DryShips Inc. (NASDAQ: DRYS) today announced that the Company Chairman and Chief Executive Officer, George Economou, will host an Investor Day conference on Monday, June 16th, 2008 at 2:15pm in New York City.
If you would like to attend this event, please contact our investor relations advisor, Capital Link at 212-661-7566 or by email at dryships@capitallink.com.
An audio replay of the event will be available on the DryShips website www.dryships.com the day following the event.
About DryShips, Inc.
DryShips Inc., based in Greece, is an owner and operator of drybulk carriers that operate worldwide. As of the day of this release, DryShips owns a fleet of 48 drybulk carriers comprising 5 Capesize, 32 Panamax, 2 Supramax, 9 newbuilding drybulk vessels, with a combined deadweight tonnage of over 4 million tons.
DryShips Inc.'s common stock is listed on the NASDAQ Global Market where it trades under the symbol "DRYS".
Visit our website at www.dryships.com
Investor Relations / Media: Nicolas Bornozis Capital Link, Inc. ,New York
Tel. 212-661-7566
E-mail: dryships@capitallink.com
DRYS is expected to earn 5 bucks this quarter and 16-22 on the year. I own it and some DSX also. There is a DRYS board at Investor Village http://www.investorvillage.com/smbd.asp?mb=2450&pt=m
Kuwaiti MPs file bill to cut oil output
6 hours ago
KUWAIT CITY (AFP) — Opposition MPs filed a bill on Sunday that could effectively slash Kuwait's oil output if it is found that the Gulf state's proven reserves are actually much lower than official estimates.
The proposed legislation, signed by four MPs, stipulates that annual oil output from Kuwait, OPEC's fourth largest producer, should not exceed one percent of proven reserves.
It also requires the state to disclose to parliament the emirate's actual proven reserves, which Kuwait says officially stand at about 100 billion barrels, 10 percent of global reserves.
However, some reports say the emirate has inflated its oil wealth and that proven reserves could be as low as around 24 billion barrels.
In the past few years, Kuwait has been producing just under one billion barrels per year, one percent of the official reserve figure.
If the bill is approved, it could force the emirate to cut its output from 2.55 million barrels per day currently to a quarter of that, at a time when the world is demanding higher oil production.
The authoritative industry newsletter Petroleum Intelligence Weekly reported in January 2006 that Kuwait's oil reserves stood at 48 billion barrels, based on internal Kuwaiti records seen by the newsletter.
The PIW report also claimed that Kuwait's fully proven reserves amounted to only 24.2 billion barrels.
MPs said the PIW claim is supported by a confidential report issued in 2001 by Kuwait Oil Co, the state's oil exploration and production company.
They also said that the government has since failed to provide credible information about the size of Kuwaiti proven reserves "which raises doubts about the actual size of those reserves
Some links for news etc.
http://www.rigzone.com/
http://www.theoildrum.com/
Tanker rate info and brief weekly report...
http://pareto.no/no/PF-Bassoe/Weekly-Reports/2008.aspx
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html
Alan R. Elliott
Fri Jun 13, 6:00 PM ET
When BP announced on June 10 that its massive Thunder Horse offshore oil and gas production facility would ease into operation June 14, the milestone came both ahead and woefully behind schedule.
At 120,000 tons, the Thunder Horse platform is arguably the largest moored semisubmersible vessel in the world. It reaches through mile-deep seas to 25 wells on the ocean floor. Each well bores another three miles down through ice, mud and rock.
Equipment from companies like FMC Technologies (NYSE:FTI - News) links the wells into a subsea complex roughly the size of Houston.
Hurricane Dennis dealt Thunder Horse a critical blow in July 2005, leaving the platform listing wildly into the Gulf. The blow stalled the project's original 2005 start date.
A year later, further delays. Tests revealed cracks in one of FMC's massive manifolds on the seafloor. Equipment engineered to take on scorching hot oil grew brittle as it sat dormant at super-chilled sea-floor temperatures.
BP (NYSE:BP - News) pulled all its ocean bed hardware and re-engineered it to higher specs. The glitch pushed the planned launch date back to late this year. A startup this weekend would put production well ahead of that delayed timetable.
In spite of costs estimated in the tens of millions of dollars to lift and re-manufacture the equipment, BP said the biggest loss would be in delayed production.
Thunder Horse is designed to process 250,000 barrels of oil a day, worth about $32 million.
The project and its challenges spotlight an industry banking on untested technology.
As super-major oil operators move further into ultra-deep-water projects -- seeking large-scale oil and natural gas reserves beyond the influence of political upheaval -- FMC and its peers are outfitting what is probably the most ambitious undertaking since the space program.
"What we are seeing offshore represents the greatest technical achievement of our civilization," said Richard Mason, publisher of the Land Rig Newsletter. "I think it is actually more complicated than trying to send something to the planet Mars."
http://news.yahoo.com/s/ibd/20080613/bs_ibd_ibd/20080613industry
Demand Growth, Not Speculators, Behind Oil-Price Surge, U.K. Says
By PAUL HANNON and LAURENCE NORMAN
June 13, 2008
LONDON -- The recent rise in prices of oil and other commodities isn't being driven by speculation, but rather by supplies not keeping up with rising demand, the British government said.
The report was released Thursday, as governments in Europe and around the world are scrambling to find ways to address complaints from an angry public about high oil prices. However, there is still little consensus over possible remedies -- or even the cause of the price surge.
Italy, for example, planned to present a meeting of global financial officials Saturday with a plan to curb oil and other commodity prices by targeting market speculators. The Organization of Petroleum Exporting Countries has also traced the soaring oil price to speculators -- even as it declines to boost its production to address the problem.
French President Nicolas Sarkozy, meanwhile, has called for a Europe-wide reduction in fuel taxes.
The report from the British government suggested that the Italian plan wouldn't receive a sympathetic hearing at the Group of Eight meeting in Osaka, Japan, on Saturday.
"Investment activity in the financial markets is not driving prices, although in following them it could in the short term be having a small and transitory impact," the report prepared by the British Treasury said.
British Prime Minister Gordon Brown said Thursday that he would discuss oil issues with U.S. President George W. Bush, who was to arrive in London on Sunday as part of his European tour. Mr. Brown also told a news conference he would attend a June 22 gathering of oil producers and consumers in Saudi Arabia, but said he didn't expect short-term production changes.
The U.K. report said governments should cooperate to ease the short-term impact of higher commodity prices, and take long-term steps to "address underlying causes of inefficiency in the commodity markets, including action against protectionism."
Write to Paul Hannon at paul.hannon@dowjones.com and Laurence Norman at laurence.norman@dowjones.com
Demand Growth, Not Speculators, Behind Oil-Price Surge, U.K. Says
By PAUL HANNON and LAURENCE NORMAN
June 13, 2008
LONDON -- The recent rise in prices of oil and other commodities isn't being driven by speculation, but rather by supplies not keeping up with rising demand, the British government said.
The report was released Thursday, as governments in Europe and around the world are scrambling to find ways to address complaints from an angry public about high oil prices. However, there is still little consensus over possible remedies -- or even the cause of the price surge.
Italy, for example, planned to present a meeting of global financial officials Saturday with a plan to curb oil and other commodity prices by targeting market speculators. The Organization of Petroleum Exporting Countries has also traced the soaring oil price to speculators -- even as it declines to boost its production to address the problem.
French President Nicolas Sarkozy, meanwhile, has called for a Europe-wide reduction in fuel taxes.
The report from the British government suggested that the Italian plan wouldn't receive a sympathetic hearing at the Group of Eight meeting in Osaka, Japan, on Saturday.
"Investment activity in the financial markets is not driving prices, although in following them it could in the short term be having a small and transitory impact," the report prepared by the British Treasury said.
British Prime Minister Gordon Brown said Thursday that he would discuss oil issues with U.S. President George W. Bush, who was to arrive in London on Sunday as part of his European tour. Mr. Brown also told a news conference he would attend a June 22 gathering of oil producers and consumers in Saudi Arabia, but said he didn't expect short-term production changes.
The U.K. report said governments should cooperate to ease the short-term impact of higher commodity prices, and take long-term steps to "address underlying causes of inefficiency in the commodity markets, including action against protectionism."
Write to Paul Hannon at paul.hannon@dowjones.com and Laurence Norman at laurence.norman@dowjones.com
More Nigeria news..
LONDON (Thomson Financial) - Anglo-Dutch oil Royal Dutch Shell Plc. said it will not be able to honour June and July contracts from its Bonny oil terminal after a militant group sabotaged its key crude oil supply pipelines
http://www.sharewatch.com/story.php?storynumber=353504
http://news.yahoo.com/s/ap/20080612/ap_on_bi_ge/oil_prices_121
Production will probably fall down after these guys take over," said Phil Flynn, an analyst at Alaron Trading Corp., of reports that Nigerian National Petroleum Corp. plans to take over operations from Shell in Nigeria's southern Ogoni district.
Nigeria nationalized one of Shell's assets. It was about the time that the news broke that oil and gold reversed.
Nigerian State Oil Company Takes Over Shell's Ogoni Operations
2008-06-12 13:10 (New York)
By Julie Ziegler
June 12 (Bloomberg) -- Nigerian National Petroleum Corp., the state oil company, will take over operations in the Ogoni district of southern Nigeria from a Royal Dutch Shell Plc joint venture in an effort to revive oil production, the country's president said.
The removal of Shell will ``calm down'' unrest by local residents of Ogoniland, Nigeria President Umaru Yar'Adua said in astatement today following his talks with French President NicolasSarkozy in Paris. Yar'Adua had said June 4 that it would appoint another operator for Ogoni oil operations, without saying who.
Militant violence has shut about 20 percent of Nigeria's oil production since early 2006, and recent attacks on pipelines have allowed Angola to surpass the country as Africa's biggest oil producer. Nigeria is also renegotiating decades-old production agreements with foreign companies to garner a larger share of the wealth created by record oil prices.
Shell spokesman Tony Okonedo declined to comment.
Shell, Nigeria's biggest foreign oil producer, was forced to quit Ogoniland in 1993, shutting Bomu and other oilfields pumping about 28,000 barrels a day because of threats to employees from local communities. Access to repair pipelines and installations there has frequently been denied by locals.
Watch for news on "Thunder Horse" startup. They are just now getting that thing back together and it will add 250k barrels per day of production once fully operational.
China's crude-oil imports jumped 25 percent last month from a year earlier as refiners boosted fuel production to meet higher demand in southwestern regions rattled by an earthquake. Imports rose to 16.2 million metric tons in May, or about 3.8 million barrels a day, the Beijing-based Customs General Administration of China said on its Web site today.
Oil Rises More Than $5 on Larger-Than-Expected U.S. Supply Drop
By Mark Shenk
June 11 (Bloomberg) -- Crude oil rose more than $5 a barrel in New York after a U.S. government report showed that inventories declined for a fourth week, increasing concern stockpiles may be strained during the summer driving season.
Supplies fell 4.56 million barrels to 302.2 million last week, the Energy Department said, three times what was forecast in a Bloomberg News survey. Prices also climbed because the euro rose against the dollar, China said oil imports climbed 25 percent last month and BP Plc Chief Executive Officer Tony Hayward said Russian output may continue to fall.
``This move was sparked by the very bullish crude inventory number,'' said Daniel Flynn, a broker with Alaron Trading Corp. in Chicago. ``Falling inventories make us vulnerable to disruptions. The cheap dollar is only adding fuel to the fire.''
Crude oil for July delivery rose $5.07, or 3.9 percent, to settle at $136.38 a barrel at 2:48 p.m. on the New York Mercantile Exchange. Oil reached a record $139.12 a barrel on June 6. Futures have doubled in 12 months as investors looking to hedge against the dollar's drop helped push oil, gold and corn to records this year.
Continental Airlines Inc., the fourth-largest U.S. carrier, said travel demand will decline as the industry boosts fares to help recoup record fuel costs. Continental said on June 5 that it will cut 3,000 jobs and slash its jet fleet by 18 percent.
UAL Corp.'s United Airlines, the second-largest U.S. carrier, said June 4 it was shutting its low-fare Ted brand and retiring 70 planes. No. 3 Delta Air Lines Inc. said June 3 it would cut an unspecified amount of U.S. seating capacity beyond the 11 percent reduction announced in April.
Railroad Pain
Railroads are also struggling with the increase in fuel costs. Burlington Northern Santa Fe Corp. tumbled the most since August after UBS AG recommended investors sell the shares on concern the second-largest U.S. railroad may cut its earnings forecast as fuel costs rise.
U.S. crude-oil stockpiles fell 7.2 percent in the past four weeks, the department said. Supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, rose.
Refineries operated at 88.6 percent of their capacity last week, down 1.1 percentage points from the week before, the department said. Analysts were forecasting a 0.3 percentage point increase in operating rates.
Falling Demand
``Refiners are managing the crude supply they have on hand because they are worried about weak product demand,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. ``Both gasoline and distillate demand over the last four weeks are down from a year ago.''
Fuel consumption averaged 20.4 million barrels a day in the four weeks ended June 6, down 1.3 percent from a year earlier, the department said.
U.S. gasoline demand increases during the summer, when Americans take to the highways for vacations. The peak- consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September.
Gasoline futures for July delivery rose 14.65 cents, or 4.4 percent, to settle at $3.4658 a gallon in New York. Futures reached an all-time high of $3.565 on June 6.
U.S. pump prices passed $4 a gallon for the first time last weekend. Regular gasoline, averaged nationwide, rose 0.9 cent to a record $4.052 a gallon, AAA, the nation's largest motorist organization, said today on its Web site.
The euro increased 0.6 percent to $1.5558 at 3:11 p.m. in New York, from $1.5467 yesterday.
The euro strengthened today as European Central Bank council member Athanasios Orphanides said he can't rule out more interest-rate increases after July. ECB policy makers have not followed the Federal Reserve and the Bank of England in cutting interest rates to spur economic growth.
Fighting Inflation
``The so-called speculators are using oil as an asset class to store value as the dollar drops,'' said Bill O'Grady, director of fundamental futures research at Wachovia Securities in St. Louis. ``We probably won't see oil fall by much until the Fed makes fighting inflation a priority, raises interest rates and the dollar strengthens.''
China's crude-oil imports jumped 25 percent last month from a year earlier as refiners boosted fuel production to meet higher demand in southwestern regions rattled by an earthquake. Imports rose to 16.2 million metric tons in May, or about 3.8 million barrels a day, the Beijing-based Customs General Administration of China said on its Web site today.
Russia's tax system takes 90 percent of a company's earnings when oil prices rise above $30 a barrel, BP's Hayward said. The nation's crude production will fall this year, according to his estimates. Russia is the world's second-biggest oil supplier.
Russian Response
``Russian authorities are responding'' with fiscal regime changes, though it may take ``a couple of years to reverse the current trend,'' Hayward said at a presentation in London today.
Global oil production fell for the first time in five years in 2007 and reserves also declined as prices rose to records, BP Plc said today in its annual Statistical Review of World Energy. Output dropped 0.2 percent to 81.533 million barrels a day last year, the company said.
Saudi Arabia is inviting heads of state from the Organization of Petroleum Exporting Countries and oil-consuming nations, along with representatives from oil-trading banks, to a meeting to discuss the impact of record energy prices. The gathering is scheduled for June 22 in Jeddah, Saudi Arabia.
``This one is different,'' OPEC Secretary General Abdalla el-Badri said in an interview in London. ``This one is specifically to tackle the high oil prices, why they are high, who is to blame. Is this a real shortage in the market, or speculation, or the dollar? What is wrong?''
The International Energy Agency stands ready to release emergency stockpiles because the world faces an ``oil crisis,'' the agency's chief, Nobuo Tanaka, said in an interview in Tokyo. The IEA, which advises 27 developed nations on energy policy, was set up in 1974 in response to the Arab oil embargo.
`Threat to OPEC'
``There is no supply shortage at the moment, so I don't know why the IEA is saying that it may release stockpiles,'' O'Grady said. ``It may be a threat to OPEC more than anything else.''
President George W. Bush and German Chancellor Angela Merkel said more sanctions will be placed on Iran if the government continues to ignore demands to suspend uranium enrichment. Bush also reiterated that all options remain open regarding Iran, after talks in Germany with Merkel.
Brent crude oil for July settlement rose $4, or 3.1 percent, to $135.02 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $138.12 on June 6.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.
Last Updated: June 11, 2008 15:43 EDT
The weather reports from the mid-west are pretty bad. Corn is about 25% of the DBA holdings. So it's popping. sorry, couldn't resist.....
A response to Ted Butler..
http://www.safehaven.com/article-10491.htm
June 11, 2008
Putting Loin-Cloth On The Naked Bogeyman
by Antal E. Fekete
A Primer on the Silver Basis
I started writing this piece as the sub-prime crisis was unfolding. I wanted to establish the connection between the silver basis and the budding banking crisis caused by phony bond insurance schemes and the lack of hedging irredeemable dollar debt with metal holdings. My original title was Putting Clothes on the Naked Bogeyman. As writing progressed I realized that it would take more than one article to dress up the bogeyman; hence the revised title.
Trading hedged corn
When I tell my audience at Gold Standard University Live that huge quantities of commodities are bought and sold every day without any reference to the price, my words are received with an incredulous silence. It appears incredible to the uninitiated that the price risk can be neatly side-stepped. I have to explain to my listeners that when the professional grain trader gives an order to buy or sell corn, he may be unaware whether the price of corn is up or down. He doesn't care. He is buying and selling hedged corn, and he takes his clues from the basis, not the price of corn itself. He has replaced price risk with basis risk which he knows how to handle as its behavior is less erratic and more predictable. Most people don't realize that the bulk of grain trading on the futures markets is driven not by the price but by the basis. In the grain market by basis is meant the difference between the futures price and the local cash price of the grain. Thus the basis varies from place to place, and from one delivery month to another. Trading the basis means buying or selling hedged grain. The merchant goes long on the basis by purchasing hedged grain when the basis is wide, and selling it when the basis is narrow (possibly negative). He goes short on the basis by selling hedged grain first when the basis is narrow (possibly negative), and selling it later when the basis is wide.
The myth of naked shorts
The silver market is similar. Large quantities of silver are bought and sold every day without reference to the price. Professionals trade hedged silver on clues from the silver basis. They are not gambling on the price variation of silver: they want to earn a reliable income on physical silver already in store. They may do this on their own account or, more typically, on customer account. The ever growing inordinate and concentrated naked short position in the face of a strongly rising price is a myth.
I defined silver basis in my earlier articles as the difference between the nearest futures price and the cash price of silver (see references).
It is puerile to assume that most professional traders are naked short in silver, just as it would be sheer ignorance to suggest that most professional traders of grain are naked short in corn. They are not. You may rest assured that their corn is well in place in a grain elevator somewhere. If the elevator is registered with the commodity exchange, then the hedger may post a reduced margin on his position. But the elevator need not be registered, in which case the hedger posts full margin. While this is not typical in the grain trade, it is quite common in the silver trade. Rightly of wrongly, the silver trade is surrounded with far more secrecy than the grain trade. This has to do with the fact that silver is considered a monetary commodity by many in the first place, and an industrial commodity only in the second. We must understand that lots of people are accumulating silver not so much for the ride to $1000, which may or may not happen, but in protest against low interest rates on passbook savings and certificates of deposit. They are happy to post full margin instead of the lower hedge margin on their short position in silver in exchange for anonymity. Of course, the exchange knows that theirs is a hedge position, but must treat this information as confidential. So must the C.F.T.C.
Let's start by reviewing the differences between the grain and silver trade. As most grain is sold to the ultimate consumer within the year of production, the basis has a yearly cycle with trough just before and peak just after harvest. By contrast, the silver basis is not cyclic. Silver is typically accumulated year after year by investors and bullion banks. Instead of an annual cycle following the crop year, the silver basis has a long-term falling trend, a strong hint of a slowly developing shortage. It is impossible to predict when shortage will hit. After every major price advance there is profit-taking by unhedged investors, and after every major price decline there is short covering by hedged investors and bullion banks. Net selling through profit-taking and net buying through short covering may or may not balance out. Accordingly, the trend towards a permanent silver shortage is going to be uneven.
Historical sketch of the grain trade
Farmers produce billions of bushels of grain every year. Most of this grain is sold several times in the futures markets as part of the basis-trading before it is consumed. An understanding of the historical development of the futures markets may be helpful. Standardized futures contracts began trading on commodity exchanges in the late 1800's. Futures markets revolutionized the way cash grain was traded and gave the grain elevators and the farmers the ability to buy and sell more easily and profitably. Grain companies learned how to use futures contracts more effectively to manage risks, and to maximize income from their elevators. The big revolution was the advent of basis-trading, to replace price-trading. This revolution is not mentioned in school curricula; not even in university curricula. This is a pity. The story of basis trading is a story of capitalism triumphant. It teaches how the free market can overcome the capriciousness of nature. As more and more people learn the skills of basis trading, profitability grows and business expands.
The grain business prospered until the 1930's when the Great Depression began and governments became heavily involved in grain trading. Government programs dominated the marketplace. Storage of grain was encouraged and construction of new elevators was subsidized. However, the market was stagnant, to a large extent precisely because the new elevator space was taken up by government-owned grain. This grain was just sitting there in the elevators, until it was ultimately given away to other governments or to charities.
In the 1970's governments decided to reduce their presence in the grain market. A new era started when market forces were allowed to prevail once more. The grain business re-learnt how to increase efficiency, manage risks, and generate income through basis trading. Generally, the abundance of grain kept the market stable. Under these conditions the opportunity for trading was confined to buying and holding grain. This is known as the "carry trade": buying when the basis is at its highest and selling when it is at its lowest. The basis was following a consistent pattern and as it declined from harvest to the end of the crop-year, the grain trade was provided with a reliable income.
It would take a sizeable drop in production to cause any significant move in the price and a deviation of the basis from the customary pattern. While it did not happen very often, the market came away with the flying colors proving the superiority of trading the basis over trading the price especially under volatile conditions.
The 21st century brought new challenges to the grain trade. The market became demand-driven. Increasing population and improved living standards around the world opened up markets to more people and boosted demand for processed food and other consumer products. There has been a tremendous growth during this first decade of the century. In addition to the carry trade, "value added trade" has put in an appearance and started growing. In this environment grain does not sit around in elevators for a long period of time. The market absorbs it and makes it into all kinds of products for human and animal consumption. Most recently grain has started trading also for use in energy production. All these changes contributed positively to basis trading as it has changed the dynamics of the marketplace.
Of course, not all grain traders are trading basis. A dwindling number still trade price. Most of these traders are barely surviving. They will have to learn the skills of basis trading, or perish. It is a safe bet that no new grain elevator is being built with trading the price in mind. They are built with trading the basis in mind. Those who are still trading price are missing one of the great opportunities of the century by not understanding basis.
Historical sketch of the silver trade
Second only to gold, silver is a monetary metal. This means that above ground silver represents several years' output of the mines. One should not be misled by the propaganda line that this silver "has been consumed by industrial applications". The recovery of scrap silver is a function of the price. As the price of silver rises, the rate of recovery will rise with it, sometimes dramatically. In addition, an unknown but substantial amount of silver still exists in monetary form. Owners do not want to reveal their identity, or the size of their hoard. But this does not mean that monetary silver has disappeared in consumption. There is no support for the claim that silver is in short supply, or that silver has ceased to be a monetary metal. Any apparent shortage simply means that the carry trade holds back stocks from the market in hope of an early price advance. At the right price it will make the metal available.
Prior to 1873 the price of silver was stabilized through monetary legislation at $1.29 per oz. After the Civil War the U.S. Mint was closed to silver. The German government also closed its Mint to silver in the wake of the Prussian victory over France about the same time. Silver was dumped in the markets in unprecedented amounts, driving the price down to as low as 70 cents by the end of the 19th century. Although the price spiked back to $1.29 at the end of World War I, it did not last and during the Great Depression it hit a low of 25 cents. We may add that upheavals in the silver market were a direct consequence of government meddling. Ultimately people have learnt how to neutralize the destructive influence of the government in an effort to control money, and they borrowed a leaf from grain merchandising manuals in trading the silver basis.
Through all this time up to 1965 there was no silver trading on the organized commodity exchanges for reasons of insufficient volatility. By 1965 the world market price threatened to exceed the statutory price, as demonstrated by the disappearance of silver coinage from circulation, and volatility perked up. Silver trading on the organized commodity exchanges started. However, secrecy continued to surround the silver trade as one monetary crises followed another at more or less regular intervals. There was a conception that silver could also be confiscated as gold was in 1933. In the event, the ban on gold ownership and trading was lifted in the U.S. at the end of 1975, allowing gold futures trading to start and giving a boost to silver futures trading already in progress.
Secrecy prevailed and manuals on how to trade basis in the gold and silver markets were never made public. Those anxious to learn basis trading of the monetary metals had to buy the manuals for basis trading in grains, and work it out for silver and gold on their own. This is not as easy as as it sounds, because of pitfalls due to the fact that trading monetary metals differs from trading grains in almost every respect. Having said that, there is no question that basis trading in gold and silver is a wide-spread practice preferred by the most conservative investors, and even the more venturesome cannot do without at least a rudimentary understanding of the underlying principles. We have mentioned above that trading the basis for grain instead of trading the price was a triumph of capitalism. Man has learned how to overcome the capriciousness of nature. The same also happened in the silver market: trading the silver basis increasingly replaced the trading of the silver price. The difference is that here it was not the capriciousness of nature but the capriciousness of governments that has been overcome. Governments want you to believe that they can create and destroy value at will by monetizing debt while demonetizing silver and gold. In effect they cannot do either in a durable way. Government magic goes only so far as gullibility of the people.
Gold Standard University Live is a world leader in offering regular panel discussions and primers on basis trading of the monetary metals. There are plans to run workshops as well on basis trading. The next session is scheduled from July 3 through 6 at the Martineum Academy in Szombathely, Hungary, to be followed by a session in Canberra, Australia in November (see Announcement at the end of this article).
The Last Contango in Washington
Volatility in the gold and silver markets is like a dormant volcano. Unannounced, it erupts periodically with increasing ferocity. As it does, trading the gold and silver price is becoming ever more treacherous. There can be no doubt that the answer is basis trading, that is, buying and selling hedged gold and silver. It is only a matter of time before a trading house or bullion bank will offer this service.
The significance of the silver and gold basis can be found in the role they play as an early warning system. Under normal circumstances backwardation in gold and silver is an aberration. Monetary metals must be sufficiently plentiful in order to serve as such. This translates into contango. But at the time of monetary disturbances, like the one triggered by the sub-prime mortgage crisis, the monetary metals tend to go into hiding. As they do, the cash price goes to a premium against futures prices, and the basis goes negative, indicating the extent of scarcity. If hyperinflation is in store, gold will go into permanent backwardation, foreshadowed by a steep decline in the basis.
In an earlier article I have, somewhat flippantly, described this momentuous paradigm-shift as "the last contango in Washington" (with a bow to the movie The last tango in Paris.) The historic contango of gold will give way to permanent backwardation. It will mean that gold is not for sale at any price -- not against the irredeemable dollar. Note that while the gold price is open to government manipulation, the gold basis cannot be so easily falsified. It reflects the truth as it is. The basis never lies.
Canary in the coal mine
According to one hypothesis, permanent backwardation in silver will precede that in gold. Thus silver is the "canary in the coal mine". But you have to have ears to hear the canary sing. In other words, you must be able to read the message carried by the silver basis. If deflation and depression is in store, then the case for silver is not so clear-cut, in view of silver's extensive industrial applications. It is possible that silver will be dumped by investors fearing that industrial demand is vanishing. But again, it is also possible that the rush into gold, a regular feature of depressions, will spill over as a rush into silver. Whatever happens, the silver basis will provide a reliable early warning sign. The return of contango in silver is an indication that bullion banks are dumping silver. Continued backwardation is an indication that investors and bullion banks are still accumulating silver. Investors and traders would do well to learn all they can about the silver basis to be able to interpret events correctly as they unfold, even if they never intend to trade the silver basis.
The inordinate size of the short commitment of traders indicate that bullion banks actively trade the silver basis. Among their customers are wealthy investors and, possibly, governments or government agencies. C.F.T.C. investigators insist that there is no market manipulation in silver. I am willing to take their word at face value. Basis trading is not a market manipulation, even if done on a large scale. It is dynamic hedging, and hedging is just what the futures markets are for. While futures trading would not work without an adequate speculative following, it is not primarily for the benefit of the speculators. It is for the benefit of the hedgers. Speculators are supposed to know this and they should stop crying "foul play!"
What is seen and what is not seen
Those who hold that there is market manipulation are victims of an optical illusion. What appears as an oversize naked short position involving no more than eight trading houses or bullion banks, is just the visible side of basis trading in silver. But there is another, invisible side as well. The invisible side is hedged metal in private hoards, in the reserves of bullion banks and, possibly, in secret government depositories.
It is well-known, for example, that the Chinese government controls large stores of silver, remnants of the long-lasting silver standard in China. A lot of the silver that governments and private individuals dumped in the West after the 1873 demonetization found its way to the East, where the Chinese Mint was still open to silver. At that time China offered the only unlimited market for silver. There is some controversy about the question whether silver was flowing into or out of China between 1934 and 1949. Be that as it may, after the overthrow of the Nationalist government the Chinese Communists inherited untold amounts of silver. If there was an outflow of silver from China before the Communist takeover, it certainly stopped after 1949.
Chinese hedges are no Texas hedges
It is a plausible assumption that the wily Chinese presently trade the silver basis under a seal of secrecy. Some of the world's largest banks are in China, and they definitely have bullion trading desks. Unlike their opposite numbers in Japan and the West the Chinese banks are not brain-dead. While they also have a large portfolio of dollar-denominated assets, they are probably fully hedged by their holdings of silver and gold. The Chinese banks don't have to carry the ideological baggage of anti-gold mentality, so prevalent in the United States. Their financial condition is incomparably superior to that of banks in the dollar orbit.
In order to understand the silver saga it is important that we put ourselves into the Chinese mindset. For the Chinese silver is money, and the US dollar is a dishonored promise. They see no reason to exchange their silver for paper, of which they already have more than their fill. Their perspective on the market is entirely different from that of silver investors in the West. Their participation in the silver market is motivated by their desire to earn a return on their holding of silver in silver. A price explosion would frustrate their strategy. They don't want a supply shock in silver. On occasion they have to pacify the restless silver market through selling, with the idea of buying the material back, preferably at a better price. This is not naked short selling; this is dynamic hedging. No crusade of the "insanely bullish" can reclassify it as market manipulation.
The difference between the Chinese banks and their Japanese and Western counterparts is that the Chinese hedge paper with metal, while the Japanese and their American mentors hedge paper with paper. Theirs are Texas hedges (with reference to the anecdotal rancher who hedges his herd with long live cattle futures contracts).
Silver basis and the banking crisis
The present banking crisis necessitating unprecedented bailouts of multinational banks is not unrelated to silver basis trading. By now it is clear that the cause of the crisis is the banks' inordinate portfolio of assets concentrated in debt denominated in the irredeemable dollar, unhedged by gold and silver. By contrast the Chinese banks, which also have large dollar assets, are hedged in metal. The Chinese banks are in no need of a bailout. So much for diagnosis. The prognosis: more bank failures in the West and in Japan; further relative strengthening of banks in China.
It is unreasonable to expect that exchange officials and C.F.T.C. investigators disclose the hedging activities of bullion banks, Chinese or otherwise. I repeat, trading the silver basis is not market manipulation. The high concentration of short positions is due to the fact that governments and wealthy individuals wanting to earn a return on their silver holdings prefer to take their business to a select few trading houses and bullion banks with the necessary expertise and capital to trade the silver basis on a large scale. This offers them the best chance to preserve anonymity. The sluggishness of silver deliveries is explained by the long lines of communication. It takes time to get the silver from the East for delivery in the West. One should not read imaginary shortages into this. Presently silver is not in short supply. If it were, silver could not drop in price as much as $5 an ounce or 25 percent in a matter of days, and continue trading at the lower end of the range. Paradoxically, sluggishness of deliveries is the very proof that there is no corner in the offing -- not yet. If there were, the metal would move from East to West in supersonic aircrafts.
The best little warehouse in Comex
I strongly disagree with the tactics of Comex in putting a limit on long positions in silver and on silver deliveries, which looks like an admission that there is a shortage. Silver in approved warehouses is there to be delivered on demand. Let the chips fall where they may, and let's see what the market will do if the last bar of silver is removed from the warehouses. Limit on deliveries does not prove shortage; it only proves that the exchange is inefficient and does not favor transparency. In limiting delivery it undermines its own usefulness. The exchange should oblige hedgers to keep sufficient silver in the warehouses ready for delivery at all times, in return for protection of their privacy. Failure to comply should be penalized with margin call on short hedge positions, possibly higher than the value of the underlying contract. This would enhance the credibility of the exchange more than anything else. As it is, the best little warehouse in Comex is for window-dressing only. For serious business, such as you know what, you had better go to another warehouse.
Bleeding to death in the bull ring
It is not in the interest of wealthy individuals, bullion banks, and governments with large stockpiles of silver that the price go to $100 overnight, which could happen if secrecy were breached and anonymity blown away. As they can derive an income from their silver holdings already, these owners of silver prefer a controlled rise in the price. And that's exactly what we've got.
Failure to understand this may lead one to all kinds of superstitious beliefs concerning the power of the bullion banks to manipulate the price of silver. The panicky short covering predicted when silver was trading below $5 never materialized during the run to $20 and higher. There has been and will be a lot of short covering, but nothing what could be called a short squeeze. Not until the curtain falls on the Last Contango in Washington.
As a quick back-of-the-envelope calculation shows, if the naked silver bogeyman were real, he would have by now lost an arm and a leg after losing his shirt. He would have bled to death in the bullfight. Let's be generous and admit that he does have, at the very least, well, a loin-cloth to wear in confronting the charging bull.
The Saudis had spare capacity in 2004. It is arguable that today they have only sour crude in reserve. And they are talking about holding back new field production for future generations. Iraq needs to make an enormous investment in oil infrastructure before they can increase production much past the pre-Sadaam levels and that takes time. Will they get it? Indonesia just pulled out of OPEC because they became net importers. Mexico's production is declining rapidly. Venezuela won't spend the money to keep their production level. Economic development inside OPEC countries is causing them to use more of their own oil. So where will OPEC get the oil during the strongest demand quarters of '08 and '09? They can't pump enough now with oil at 136 during this shoulder season.
Demand has outstripped supply, demand is very inelastic and so price is lurching and spurting higher until significant demand is destroyed. China and India have more than a trillion dollars in forex reserves to subsidize oil purchases, so the demand destruction will have to come from somewhere else. hmmmmm
It's hurricane season. ;) Keep a weather channel going while shorting oil or natgas, lol.
Stocks are looking puny, so where will the big money go, if not commodities? Check out DBA today with corn limit up on bad weather news. That's what will happen to oil shorts with a 'cane in the Gulf.....
The corn crop is looking a bit weak, going to hurt ethanol production at some point. We are going to be eating more grass fed cattle and "range" chickens but I digress...
I think you can get 6-10 bucks down in crude on any given day, but have no idea how to pick the day. It's easier to buy that dip and I favor the easy path.
It's a tough assignment. I was in the Canadian royalty trusts, earning 10-12%, when their government decided to change the tax rules. It was a "Halloween" massacre
PBT and SJT are U.S. gas/oil royalty trusts. I don't like the volumes, but you might.
When I was looking at DRYS, I found DSX. It's another dry bulk shipper that pays a decent dividend.
DCR goes away on the 25th of this month. So I'd avoid it.
Once the price of oil broke 111 and stayed there, the twin funds dcr and ucr began a countdown to termination.
http://tinyurl.com/352m7a
http://www.macroshares.com/public/common/DisplayLiterature.aspx?ID=a1350926-d46e-4a45-91a3-a4966e30c07c
DUG tracks stocks, not oil and gas. When the broad market tanks 400 points it drags down the energy shares, and DUG goes higher despite the moves in oil and gas. Today, most of the energy shares in the index were higher, so dug was lower despite the decline in oil prices. I'm including a link to the components of the DJUSEN.
from the DUG profile: "The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified."
^djusen components: http://finance.yahoo.com/q/cp?s=%5EDJUSEN