Peak Prosperity For Overpriced Oil

THE DEBT CEILING SUPERCEDED AND REPLACED
Simple, easily available data on US debt shows the US actually hit its debt ceiling – if we call it $16.7 trillion – back in May 2013, at least five months ago. Today, the sovereign debt of the US is well above $17 trillion, but curiously enough this simple fact never features in the media.

What happened is the US Federal Reserve took “extraordinary measures”, followed in the fullness of political time – with the obligatory cliffhangers for TV audiences – by a three-month political extension to any practical decision, except to keep borrowing and spending.

As Warren Buffett said in an interview with CNBC, Washington would get close to the point of extreme stupidity, “but would not cross that line”.

Likewise the ultra-magic triple-digit price in dollars of US WTI needs extraordinary measures to stay that over-priced. Oil flirted with the $99.99 price floor, today, 21 October. Not so long ago, WTI was very confidently forecast by some of Wall Street's most powerful market manipulators – sometimes called “investors” - as easily able to attain $125 per barrel before December 31st.

Even by mid-morning, New York time, 21 October, the plunge protection team was clearly at work trying to repair the damage, because falling oil prices are a challenge to New Normal.

The extent to which the team succeeds in its quest, which is recurrent and even cyclic, with its most recent peak in 2008, can be questioned this time around. On strict fundamentals-only, oil is overpriced by at least $20 a barrel. Leaving in place the Syrian surcharge or Middle East risk premium of perhaps $10 a barrel, we get a realistic non-manipulated target price around $89 per barrel for WTI. Without that risk premium we get a maximum sticker price of $80 per barrel for WTI.

HELPED OR HINDERED BY THE DOLLAR?
Conventional oil analysts and trader lore says that if the USD declines, oil prices in dollars normally rise “mutatis mutandis” but even if we forgot our Latin, the outlook for the USD plunging - against what? - presents a lot of intellectual problems. Against oil is what the oil bulls hope.

Quoted on Pravda.ru, October 16, scholar Mikhail Khazin said: "Those who are professionally engaged in economic matters, in one voice say that there are not years, but months or even weeks left before the collapse." To be sure he meant a collapse of the USD and its role in world trade – especially oil trade. Conversely, Khazin said nothing at all about the Russian ruble becoming the world's new petrodollar, nor the RMB, nor gold – we can tell him that oil-gold trades will be hampered by persistent weakness inside the bullion market, upstream corporate debt for miners hitting extremes, but revenues declining, and soft gold mining stock prices being sure and certain for some while forward.

Forecasts that the USD is going to tank – against what? - face so many hurdles in the real world we can bet with the contrarians that the world value of the dollar will rise a little, if not a lot, in coming days and even weeks. Dragging down the oil price.

In a normal world, nothing like New Normal, as pointed out by Alistair Macleod in a long interview with Chris Martenson on 'Peak Prosperity', October 19, the role of QE worldwide, whether its the US Fed, the ECB, the BOE or BOJ has reached a saturation effect in artificial wealth creation, and is now only a wealth transfer operation. Only those players close to the money spigot will now get the spinoff or “trickle down” from printed money. Everywhere else in the economy, local and global, we get deflation. Oil prices will therefore deflate – not inflate.

TIMELINES FOR CHANGE
Right across the commodities space – except oil – natural resource prices are wilting. This is new normal. The back-flow current and negative feedback effect is strong, but oil still counts a large number of deep-pocket players habituated – or addicted to getting a reliable return from betting that oil prices will rise. Being slow-witted and slow to change, their paradigm change takes time.

Measured by mostly all-time record highs for major stock exchanges, as in Europe during its fifth straight year of economic decline with 27 million unemployeds - making Jobless Europe the No 7 “country” in the EU 28-country grouping – asset prices have reached a peak, or very close to. Further growth can only be slow, but decline can only be fast.

Oil tracks equities a lot more than the USD's world value, meaning that when equities tank – oil tanks.

Whether or not equity markets can be maintained at extreme highs, and then grown some more, is a daily question these days, and the answer will soon be No. Some while before that “unexpected crisis” occurs, oil will have to tiptoe away from its previous overpriced peak value. At that time, the plunge protection team will abandon its warm, previously reliable support to overpriced oil – and that time could be now or very soon.