Wednesday July 16, 2008

NYMEX crude oil falls $10 on deep recession fears amidst stock market meltdown

bloomberg.com, biz.yahoo.com :

NYMEX crude oil prices fell more than $10 a barrel to as low as $135.92 from session highs on concern that a slower US economy will curtail demand for oil and gasoline. Earlier, oil rose to $146.73 as the dollar fell to an all-time low of $1.6038 per euro. Crude oil futures reached a record $147.27 per barrel on 11 Jul 2008. Fed chairman Ben Bernanke said risks to US growth and inflation have increased, while US stocks tumbled, and the S&P 500 index reached its lowest since 2005. "We're getting to the point where the market's looking at an increasing likelihood of a deep recession," said James Ritterbusch, president of Ritterbusch & Associates.

- The complete meltdown of Fannie Mae and Freddie Mac could be the trigger event that sets everything off. The markets are going absolutely crazy right now as I write this, with multiple billions of shares changing hands frantically, and all 3 major US indexes exploring the depths of bear market territory. Just the day before, I sent off to friends via email and IM the "world is going to hell" edition of my blog posts on Indonesia's natural gas situation, their rolling blackouts, Matt Simmons going doomer, and our dear Fannie and Freddie. And I was going around telling people exactly that. Trillion-dollar meltdown. End of the world.

Now, with the stock meltdown going on, and oil down over $10, as peakoilers, here are some questions that we might want to ask :

- Have the supply and demand fundamentals really changed?
- Is US demand going to drop faster than rising demand in emerging economies?
- Are Export Land Model countries such as Indonesia going to suddenly begin exporting more again?
- Is demand destruction finally kicking in?
- Is demand falling faster than shrinking supply?

As far as I am concerned, the answer to all the above is NO. Barring a miracle, the discovery of another five Ghawars or North Seas, or aliens landing on the White House lawn, the supply situation certainly is not going to change. Peak oil is peak oil. The supply situation is worsening, not getting better. Not with giant oil fields such as Cantarell in Mexico depleting 18% per year, and after a few more years like this, there won't be very much left.

As for the demand situation, it has been said that for every 1 barrel of US or in fact Western demand reduction, the demand in the emerging economies in the rest of the world is going up 14 barrels. So, demand will continue to increase unless US demand also falls by the same 14 barrels, cancelling out the rest of the world. If so, that would make the Great Depression look like a picnic. Even then, in the depths of the 1920's Depression, energy usage only went down by around 8%.

For all we know, this could well be the start of the Second Great Depression, it could be worldwide in scope, *and* it could lead to drastically lower oil consumption globally. But, long before the panic really starts on that front, there is one last financial Weapon of Mass Destruction left to be deployed - global hyperinflation. If it is going to turn out that way, you will want to be in tangible assets such as commodities, physical goods, food, water and shelter. Paper assets will be valued for their energy content - as fuel for burning. And if it really does turn out this way, let it not be said that nobody saw this coming.

See also :

1. Fannie, Freddie too big to fail, else a trillion dollar meltdown
2. NYMEX crude oil jumps $10 in 2 days, hits $147.27 record on Iran, Brazil, Nigeria, dollar

(2008-07-16 01:20:06 SGT) [Energy] Permalink

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