Wednesday, March 7, 2012

“Nothing To Spare”, Crude Could Reach $200 (Erste Group’s Complete 2012 Oil Price Outlook)

The latest in a series of re­ports eval­u­at­ing the fu­ture of the en­ergy mar­kets, es­pe­cially in the con­text of the in­creas­ingly in­ev­it­able Ir­a­ni­an con­flict, may just be the best and most com­pre­hens­ive one (not just be­cause it looks at the com­mod­ity from an "Aus­tri­an" angle). In 82 pages, Aus­tri­an Er­ste Group has ex­trac­ted the key as­pects and vari­ables for the world oil mar­ket and come up with a simple con­clu­sion: "noth­ing to spare." To wit: "We see the risks for the oil price heav­ily skewed to the up­side. At the mo­ment, the mar­ket is well sup­plied, but the smoul­der­ing crisis in the Per­sian Gulf could eas­ily push oil prices to new all-time-highs should it es­cal­ate. We be­lieve that new all-time-highs can be reached in H1, at which point we could see de­mand de­struc­tion set­ting in. We fore­cast an av­er­age oil price (Brent) of USD 123 per bar­rel between now and March 2013…The lat­ently smoul­der­ing Ir­an crisis seems to be close to es­cal­a­tion. The most re­cent man­oeuvres, os­ten­ta­tious threats, sanc­tions, em­bar­goes and the shad­ow war cur­rently on­go­ing, have heated up the situ­ation fur­ther. It seems we may soon see the last straw that breaks the camel’s back. Even though Ir­an could prob­ably only main­tain a block­ade of the Straits of Hor­muz only for a very lim­ited peri­od of time, the con­sequences would still be dra­mat­ic. The oil price would def­in­itely set new all-time-highs and could reach levels of up to USD 200." En­joy those price dips while you can.

Brent oil set a new av­er­age all-time-high of USD 111/bar­rel in 2011. This price also ex­ceeded the 2008 and even the 1979/80 ref­er­en­tial val­ues on an in­fla­tion-ad­jus­ted basis. The main drivers of the oil price last year were the sup­ply side and the un­rest in the MENA re­gion. Not even the lat­ent wor­ries about an eco­nom­ic slump in Europe, the US or es­pe­cially China had much of an im­pact on the oil price. The in­creas­ingly ex­pans­ive mon­et­ary policy of the Fed­er­al Re­serve, the ECB, the Bank of Eng­land, and the Bank of China also came with a stim­u­lat­ory ef­fect. Giv­en that the Fed will now con­tin­ue its zero-in­terest-rate policy at least un­til the end of 2014, this should sup­port the en­tire com­mod­ity sec­tor, oil and gold in par­tic­u­lar. This scen­ario seems to lay the basis for new all-time-highs.

Last year, we saw mainly up­side risks for the oil price, ex­pect­ing the wave of re­volu­tions to con­tin­ue rolling across the MENA re­gion more vig­or­ously than it ended up do­ing. For now the spill-over of the re­volu­tion has been pre­ven­ted by ap­pease­ment meas­ures worth bil­lions taken by the vari­ous gov­ern­ments. However, the sys­tem-im­man­ent prob­lems have only been covered up, not re­solved. The ini­tial eu­phor­ia of the Ar­ab Spring has mean­while giv­en way to a sense of sobri­ety.

The lat­ently smoul­der­ing Ir­an crisis seems to be close to es­cal­a­tion. The most re­cent man­oeuvres, os­ten­ta­tious threats, sanc­tions, em­bar­goes and the shad­ow war cur­rently on­go­ing, have heated up the situ­ation fur­ther. On top of this, the situ­ation in Ir­an seems tense, with a cut in sub­sidies and the on­set of hyper­in­fla­tion ex­acer­bat­ing the crisis. It seems that we may soon see the last straw that breaks the camel’s back. We will dis­cuss the polit­ic­al risks and their ef­fects on the oil price in the fol­low­ing pages.

On top of the afore­men­tioned is­sues, it seems that OPEC cur­rently con­trols the price more tightly than ever be­fore. In the cur­rent en­vir­on­ment, prices of USD 90-110 should not (yet) cre­ate any form of de­mand de­struc­tion. It seems as if the oil price were to test the pre­cise price level of that crit­ic­al threshold and then rise a bit high­er with every at­tempt. They say that the cure for high prices is high prices, as a res­ult of which both de­mand in the OECD coun­tries and sup­ply (un­con­ven­tion­al oil, new pro­duc­tion meth­ods, etc.) seem to ad­just.

A com­par­is­on of the oil price fore­casts from vari­ous oil pro­du­cers re­veals that, in the peri­od of 1999 to 2010 Mex­ico, Saudi Ar­a­bia, and Rus­sia made the most ac­cur­ate fore­casts. All three of them also came closest to the ac­tu­al price last year, which is why it makes sense to listen to their ex­pect­a­tions. For 2012 they pre­dict sub­stan­tially high­er oil prices. Saudi Ar­a­bia ex­pects an av­er­age WTI price of USD 97, Mex­ico fore­casts USD 116, and Rus­sia USD 120/bar­rel. Ir­an has giv­en the highest fore­cast at USD 137/bar­rel.

The Aus­tri­an School of Eco­nom­ics of­fers in­vestors a new angle on fore­cast­ing as­set and com­mod­ity prices. In con­trast to tra­di­tion­al eco­nom­ists, "Aus­tri­ans" do not re­gard the rising de­mand for oil or oth­er com­mod­it­ies as de­term­in­ing factor for rising prices. Rather, they view the on­go­ing in­crease in money sup­ply, which in our par­tial re­serve bank sys­tem en­tails an ex­pan­sion of cred­it, as the cru­cial factor of rising prices. For Aus­tri­ans, one thing is cer­tain: the more mon­et­ary units cir­cu­late, the lower their in­trins­ic value. As a res­ult, the sub­stan­tial in­crease in oil prices in the past year has come as no sur­prise, as for Aus­tri­ans it is not so much the de­mand for a good such as oil that de­term­ines a price in­crease, but simply the fact that, es­pe­cially since 1971, more and more pa­per and di­git­al money has been cir­cu­lat­ing glob­ally. The fol­low­ing chart sup­ports this fact im­press­ively. While the av­er­age in­fla­tion-ad­jus­ted oil price had been USD 6.1/bar­rel with­in the frame­work of the Bretton Woods agree­ment, it em­barked on a rap­id in­crease once gold had been dis­carded as mon­et­ary basis. Since the end of the gold stand­ard the price of one bar­rel of oil has av­er­aged USD 20.6 per bar­rel.

Full re­port:

Spe­cial Re­port Oil – Noth­ing to Spare – 2012

Jay Taylor: Turning Hard Times Into Good Times

3/6/2012: Problems Ahead for China? Can Shale Oil and Gas Overcome Central Planning Inefficiency in the U.S.?

Martin Armstrong: Commodity Empire

Commodity Empire

click here to read in pdf

A Frugal Retirement: How to Live on Less

By Jeff Brown

NEW YORK (MainStreet) -- How much of your retirement savings can you withdraw each year – 7% or 1.8%? Or something in between?

The answer, of course, will make a huge difference in your lifestyle. Fortunately, if you need a smaller withdrawal to keep your nest egg going, it may not have to be permanent, and people in or near retirement can consider some attractive short-term lifestyle changes to keep life interesting on a reduced budget.

The key: Keep flexible by avoiding big long-term commitments like a second home, a large mortgage, oversized car payment or owing a pricey, unsalable condo with big association fees.

Since the early 1990s, many financial advisers have recommended starting retirement with a 4% annual withdrawal rate, or $40,000 for a $1 million nest egg. If you start there, you can increase the annual withdrawals by enough to offset inflation, and keep going for 30 years.

That was the theory, anyway. But recent research says that as conditions change the withdrawal figure could be as high as 7% and as low as 1.8%. That impressive $1 million nest egg could therefore generate a tidy $70,000 a year, or a stingy $18,000 -- before taxes.

The first thing to note is that unless you can live on a very, very low withdrawal rate, your fund would have to include some stocks and long-term bonds as well as cash. After all, a 5-year certificate of deposit yields only 1.157%, according to the survey. But stocks obviously have risks, and you could face lengthy downturns. (more)

Why Buy IBM Shares?

Move over AWESOM-O, IBM's Watson is going to rake in billions in revenue.

IBM (IBM) is firing on all cylinders lately and its share price reflects its staying power by closing above $200 a share this week. IBM's super computer Watson is going to work for Citigroup (C) and its why the Masters want in now.

Last week we recommended buying IBM shares in 3 Stocks to Buy at 12 Month Highs. IBM was trading just under its 12 month high and this week it made the $200 roll hitting $201.19.

Citigroup (C) is hiring Watson to do what no man can do. The AWESOM-O like computer will help analyze customer needs and process financial, economic and client data to advance and personalize digital banking.

Watson already does work for its health-care clients WellPoint Inc. and Seton Health Family by analyzing data to improve care. IBM executives say Watson’s skills -- understanding and processing natural language, consulting vast volumes of unstructured information, and accurately answering questions with humanlike cognition -- are also well suited for the finance industry.

Watson may add $2.65 billion in revenue in 2015, adding 52 cents of earnings per share, Ed Maguire, an analyst at CLSA in New York, estimated in a November research note (source: bloomberg via

MASTERY Bottom line:

Need another reason to buy IBM?

Watson is your answer.

Mastery expects IBM to continue to prosper in 2012.

Our 12 month target price for IBM is now $250.


3 Charts Worth Watching As Warning Signs

Today’s selloff is the first major drop that 2012 has seen. Surprisingly, traders seem to have forgotten that we had 1% moves almost daily throughout 2011.

Its too soon to say whether this is a one off or an early look to economic slowing.

We can, however keep our watch on these three charts — these are the ugliest charts in the universe of basic economic data. If they begin to turn up, it will be clear the economy is fully on the mend. So far, they have shown no signs of improvements.


Click to enlarge:



Lazlo Birinyi – Uber Bull Calls for S&P 1700 this Year

Looks like we are going to see the market’s first significant gap down of the year this morning – no specific reason, it is just “due”. There have been any number of bears who have been turned to the bull camp in the past 2-3 weeks, but one guy consistently bullish has been well known pundit Laszlo Birinyi, who came out with a S&P 1700 call yesterday on CNBC. It would be easy to say “hey that was an obvious ‘call the top’ moment” but there have been any number of similar signals (Roubini bullish, uber bullish Barron cover, etc) over the last month which have led to only more pain for bears. Either way it’s always good to see the ‘other side’ of the argument so below is the video:

  • Well-known stock commentator Laszlo Birinyi sees more than a rising stock market. The market bull told CNBC Monday he sees signs of a U.S. economy that may be doing far better than others expect. “This year the bet is GDP of 2 percent to 2.5 percent,” he said. “When I look at the market I see stocks like Cummins and, Microsoft, General Motors up 20, 30 and 40 percent. That makes me question, maybe the market’s saying something about a good economy. “I just wonder if we’re prepared for a 3 percent to 4 percent GDP? If it does [reach that level] I think we can again have a mirror of 1995 where the market surprised everybody on the upside.”
  • The head of Birinyi Associates, who has long stressed picking strong individual stocks that can resist market volatility, last week released a robust forecast for a Standard & Poor’s 500 spiking to 1,700 this year, up over 20 percent. He based the forecast on market patterns showing this year’s rally is remarkably similar to what happened in 1995, when expectations were low for both stocks and bonds.
  • “What happened was just the opposite. Interest rates went down, the market went up 35 percent” and had the best year in 50 years, Birinyi told CNBC. “As I’ve often said, the negative case is always more articulate, it’s always more rational, more reasonable because we see it,” Birinyi said. “The market is looking ahead, and I contend what stocks are telling us is a possibility, and I think a fairly good possibility, that something positive is going to develop [and] perhaps we’re underestimating the economy. Don’t disregard the possibility of something good happening.”

Chart of the Day - Taubman Centers (TCO)

The "Chart of the Day" is Taubman Centers (TCO), which showed up on Monday's Barchart "All Time High" list. Taubman on Monday posted a new all-time high of $70.81 and closed +1.41%. TrendSpotter has been Long since Oct 26 at $58.11. In recent news on the stock, Taubman on March 1 raised its quarterly dividend by 2.8% to 46.25 cents per share. ISI Group on Feb 15 upgraded Taubman Centers to a Buy from Hold. Taubman on Feb 8 reported Q4 adjusted funds from operation (FFO) of 93 cents versus the consensus of 85 cents. Taubman Centers, with a market cap of $4 billion, is a real estate investment trust specializing in owning and operating regional retail shopping centers.