Here is the comments and questions from a viewer. My response and input are italisized.
John,
I have been following your comments on oil prices and observations about China and India and the upcoming election.
I guess I have my own views and also some questions.
1) If the Democrats manage to win either the house or the senate what will the reaction be in stocks? I have read several articles indicating some bullishness being the result of some percieved notion that it will stay all republican.
The statistics that I have seen say that the 24 years prior to 2005, when the Democrats controlled the White House and both braches of congress the market rose on average of 2.3%. I don't have the stats on the republicans, but during the same period, the stock market rose on average 23.8% annually when the government was divided between the two parties.
Personally I don't see the vast improvement in numbers, 39% Last Sunday was what the McGloclin group reported (on PBS). Granted he is up from 33% but I wouldn't call that a resounding change.
The way I see it the concerns of the election follow:
1) Iraq
2) War on Terror
3) Economy
I live in Indiana and our senate race has been getting some real national attention. I believe Mike Sodrel will lose and some in Washington have been pointing to this race as a real sign of how the elections are going to turn out. It would take much more than lower gas prices for me to ignore that we are losing billions of tax payer dollars on a war we didn't have to fight. Maybe that's just me, but from the people I talk to in Indiana I think he will lose.
2) Oil prices. I think the oil prices going down have much more to do with supply and demand than with any political interference, as you inferred from the 2004 election.
My assessment about the price of oil dropping before an election was based on past events as documented by Bob Woodward in his book "Plan of Attack." I have posted the article of an interview with Woodward published in 2004. I won't go into the details, you can read and decide the merits of the information for yourself.
My bet that energy prices would fall again leading into the mid-term elections was based on my speculation that it might happen again. I didn't know energy prices would fall, I was just speculating on what has happened in the past. Don't you find it a little more than a coincidence that energy prices began falling 2 months before another election. In July and August all we heard about was tight supplies and increased demand. Then in September, out of the blue, we begin to hear talk of over supply, and the magical timing of a huge oil find in the Gulf by Chevron that has been known since 2004. I find all of this evidence a little hard to ignore.
There has been an obvious decrease off summer driving season, more indications of reserves coming online outside of OPECs control, and driving habits have forced down demand.
Also, while China continues to grow at a torrid pace, they have virtually ended using petroleum for power and have replaced it with coal supplies. In 2004 when their demand surged the infastructure to get coal was not yet built, so a big portion of their power was supplied by burning petroleum. I'm not saying their demand will stop, obviously it will increase over time, but not at the same rate in years when they were using a large amount of petroleum for power instead of coal.
Coal should be a big winner in the years ahead. At today's prices, stocks like ACI and BTU look like good bargains.
A big reason why I tend to agree with some industry insiders that we will actually see the cost of oil pushed down even more.
Though OPEC can cut production (currently at 30 million barrels a day, I believe earthwide consumption is 28.1 million barrels a day) that may not force prices back up as it may just indicate to more people that OPEC is not responsible for as much of the world supply as they have been in the past.
PRUDO bay is also not even back online yet, when BP does restart it this will send oil prices lower, or at least it should given it has not been online during this entire price drop.
The discovery in the gulf also boads well, though it will not be available for some years, if it is on the high side it should be as big as the Alaska oil field.
My friends in the investment world that travel to China, and meet with the Saudi's have stated the following;
Crude Oil
1) "Demand growth is to rise by 1.5-1.6 MMBPD in 2006-2007: Economic strength in Asia, and in China/India specifically driving the gains. China/Asia represents 25% of total global growth in demand in 2006."
2) "Supply growth limited as spare capacity has dwindled: Non-OPEC production to rise by 1.1 MMBPD in 2006 and 0.9 MMBPD in 2007 with incremental supply coming from Russia, Latin America, and Africa. OPEC is producing near full capacity."
3)" Inventories were expected to stay low through the first half of 2006: This was expected since the market was vulnerable to supply disruptions."
OPEC Perspective: Points from meetings in the Middle East:
1) "OPEC policy remains focused on price at the expense of volume following policy changes in 2000."
2) "OPEC believes the global economy can withstand higher prices than in years past."
3) "OPEC believes that more equitable sharing of wealth is warranted between affluent consuming countries and poor, producing countries. The group signed off on higher prices in 2000."
4) "OPEC has been surprised and empowered by how well the global economy has done with prices above $50/bbl. OPEC is likely to support the market at these levels."
-"Global oil demand was expected to grow by 1.5 MMBPD in 2006."
- "Global oil demand is expected to grow by 1.6 MMBPD in 2007."
That's not to say that middle east tensions won't happen, and also the report that the Thunderhorse facility in the Gulf (schedueled to deliver 250,000 barrels a day domestically) is once again delayed from production till 2008. But I think even over the coming years not just months we could see some extended relief from high gas prices.
3) China and India. We should have money invested in foreign markets, it is high time the worlds consuming force is no longer the U.S., an expansion in emerging economies could actually help us as they start to share more of the consumption of world products (other than natural resources I mean) and that eventually should lead to increased consumption of american products as the dollar falls, and emerging countries have more money.
China also is not going to be seeing these insane trading surpluses. They have devalued the Yuan continually and the EU, America, and other countries are started to get tired of it. As was made a point to China recently about how they charge more money for cars if the car has 60% of it's parts made in China, and that can't continue.
Too much GDP growth is a bad thing sometimes, China has to continue 11% growth otherwise they can't create enough new jobs for workers, but they haven't bothered to put the instruments in place to protect from inflation. (Other than they have a lot of foriegn investment in their banks, instead of domestic, which will help when they hit a recession)
I think it will be their downturn that eventually causes our economy to hit the skids. Maybe in 2008 when they run goverment spending through the roof for the Olympics that summer.
Besides, have you been to China? They are polluting themselves to death. Their consumption of natural resources will have to slow at some point and respond to some kind of government practice of sustainability.
The pollution issue is an important one, and is going to be a major factor in refining. Light-heavy spread will remain wide as demand for light-sweet crude oil increases related to new environmental mandates in North America, Europe and Asia, which require low-sulfur fuels. Capacity to refine the product remains a major issue since margins must be kept at current levels to attract new investments in new capacity. Refiners will have very little or no incentive to increase refining capacity if they begin to lose money. This is one of the reasons that (environmental being the other) many refineries shut down in the 1990's. It just wasn't profitable.
This being said, the supply of medium-heavy crude is expected to rise faster than that of light sweet crude in non-OPEC areas through 2008. Demand for heavy crude remains low while light-sweet crude demand is expected to rise 22% over the next 10 years. The demand for heavy crude is expected to decline by 7% over the next 10 years. Given the new regulations for low-sulfur crude, demand for light sweet crude is the trend. So, once again, while oil supplies may increase, the refined product is a major problem.
Just my thoughts. Anyone is free to let me know what they think.
I'm actually kind of new to investing. But I have always been heavy into world research. And I work in the energy industry, so my perspective on that comes from the inside somewhat.
