We all know from the sector rotation theory that the energy sector is the last sector to grow in every economic expansion and the energy/staples ratio turns around to decline when economy starts contracting.
So far we can’t say yet that the XLE chart is topping, though it’s possible that it is. What we can say is that the attitude of big oil companies toward oil price changed dramatically. All the last few years any price increase in oil was automatically translated into profits.
Not anymore. When oil is at record $95 and gasoline in US is far from last year maximum the profit margin is squeezed. The reason is that the consumers are not willing to pay more, they reduce the driving instead. Look at the chart:
Don’t you agree that the gasoline/oil ration is in the bear market?
The conclusion is that the big oil corporations are not happy anymore about the high oil prices. And I think that they have enough of financial and political power to start driving those prices down. It can’t be fast, it will take months, but we’ll see much lower oil prices next year.
And once the XLE starts declining the bull market is over
November 1, 2007 at 11:21 am
The butchery in APCP continues, it fell another $9 billion. Together with ABX collapse it spells big write-downs in Q4 are coming. You think that the $8 billion write-down by one of the pigmen in the last quarter was the bottom? I don’t think so…
November 1, 2007 at 1:08 pm
XOM and TSO came out today and said pretty much what you just said. Initially, TSO sold off pretty hard but it looks like its getting a bounce back right now. I think the bounce is because a lot of traders still don’t understand the crack-spread concept and they just think that every time oil goes up, XOM, VLO, TSO, etc. should also just go up.
This couldn’t be further from the truth. I’ve paraphrased the crack-spread concept as basically the “puke-point” where conumers will scale back in the face of higher prices, leading to an imbalance on the demand side of the equation. Proctor and Gamble thinks they can raise prices accross the board? Well they’re going to find out exactly what the puke-point is. Also, GDP chain deflator is another way of looking at the effects of the puke-point.
November 1, 2007 at 4:00 pm
Did you see Rex Nutting’s MarketWatch article on the chain deflator and oil prices?
http://tinyurl.com/34nsb4
November 1, 2007 at 9:50 pm
In Europe higher gas prices has not limited the sale or driving of automobiles, maybe here in the states its the distance that is the killer,
Regarding the puke point as you call it may also be a period of rationed credit and higher risk. Not to long ago money/credit was very plentiful and cheap,now credit is not so available and risk is higher, while as you stated folks do pull away from higher prices but only when and if they have no alternative, i.e. doing a refi cash out and starting another buying binge. Also before buying a house was a no brainer today the element of risk has spread into the equation for both the lender and the buyer, neither one is confortable.
November 2, 2007 at 12:36 am
In Europe gas has always been higher than in the states due to taxes, US petro dollar recycling, etc. and as a result many smaller cars and better rail systems, plus few “super commuters” that drive 1 person to a car sometimes 100mi (160km) in a day or more. In reality, the entire US economy is based upon very cheap energy prices. Think about it: many people live 1 to 2 hours away from a work center and food is trucked in from great distances, sometimes several hundred km away. Entire large suburban communities exist where there are no job centers and no agricultural activity whatsoever. Also, commercial agriculture uses cheap petro-based fertilizers and huge diesel machinery, so much of our seemingly efficient systems are in reality based on fragile commodity stability and availability.
I think you are right about your point regarding credit availability, although it seems you are mixing debt/credit and actual cashflow interchangeably and of course they are not the same thing. This underscores the true fallibility of our debt-based economy. Until recently, it was fairly routine for JULS (Joe Ultra-Light Sixpack) to simply take on ever-larger amounts of debt to supplement a lack of cashflow. As the RE bubble collapses and credit card balances reach extreme levels, this is no longer possible and the inevitable result is K-Winter credit collapse.
To bring the point home to a more personal level, today my wife went to the grocery store and was able to get roughly half of what she usually gets for the $300 budget. She was mentioning that she was astounded at the high prices and she actually bought much less than she intended on buying. So faced with a basic choice of buying the same amount of supplies that she normally does for a higher price, or getting by with less, she chose the latter. This is the puke-point in action.
November 3, 2007 at 12:34 am
Debt levels of the last decade are mostly produced by the Ponzi units. It’s just too easy to do when interest rates are in 25-year decline trend.
November 4, 2007 at 1:23 am
From the Credit Bubble Bulletin:
“But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6%… Soaring global crude oil prices…pose a serious dilemma for Beijing, which last raised its tightly controlled fuel prices in May 2006. China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 5% of its crude supply. The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.”
http://tinyurl.com/3avs4t