Charles Biderman, TrimTabs 06.23.08,
7:00 PM ETStratospheric crude oil prices precipitated by speculation are wreaking havoc on the U.S. economy.ETF Liquidity Review
Sky-High Oil Will Make U.S. Go Broke
Based on income tax withholdings data from the Daily Treasury
Statement, the wages of all U.S. workers on payrolls were unchanged on
a year-over-year basis in the past two weeks (Friday, June 6 through
Thursday, June 19) and rose 1.1% year-over-year in the past four weeks
(Friday, May 23 through Thursday, June 19). Both of those growth rates
are well below the 2.8% year-over-year in May, and they are consistent
with an economy that is contracting sharply.
As long as oil prices stay above $120 per barrel, the economy is
more likely to slow than strengthen, and companies are not likely to
announce much float shrink. With real wages falling, large numbers of
jobs being shed, gas prices exceeding $4 per gallon almost everywhere
and home prices falling about 1% per month nationally, this year is
going to be tough for American consumers.
Believe it or not, there is plenty of oil in the world. What is in short supply are investors willing to go short oil futures.
The open interest on oil futures worldwide is 2.6 million contracts.
With oil prices at $135 per barrel, each contract is worth $135,000. To
control $135,000 of oil, investors have to put up no more than $10,000.
A hefty $1.3 billion per
month flowed into commodity trading advisers (CTAs) in the first four
months of this year, and $700 million per month flowed into commodity
exchange-traded funds (ETFs) in the first five months of this year.
Those amounts do not even include investments through other vehicles by
hedge funds and pension funds. The latest issue of Barron's reports
that $55 billion flowed into commodity investments in the first quarter
of 2008, and probably at least one-third of that amount was directed
into long-only investments in oil.
In any case, if half of the $2 billion per month inflow into CTAs
and commodity ETFs were used to go long oil futures, it would be enough
to go long 100,000 contracts, which is equal to 4% of the open interest
on oil futures. In other words, open interest would grow roughly 50%
per year just from inflows into CTAs and commodity ETFs.
What is happening now is not demand destruction, it is a financial
disaster. The U.S. consumes 21 million barrels of per day. At $135 per
barrel, the U.S. spends $1.0 trillion per year on oil, which is equal
to 15% of the $6.8 trillion in take-home pay of everyone who pays
taxes. If oil prices rose to $200 per barrel, the U.S. would spend $1.5
trillion per year on oil, which would be equal to 22% of take-home pay.
Moreover, those percentages of 15% and 22% do not even include the cost
of coal or natural gas. In other words, the U.S. will be broke long
before oil prices hit $200 per barrel, and the rest of the world would
be sure to follow.
Another way to put the oil crisis into perspective is to compare
increased spending on oil to inflows into savings and investment
vehicles. For every $60 per barrel increase in the price of oil, the
U.S. spends an additional $450 billion annually, or $38 billion per
month, on oil. In the past twelve months, the inflow into savings and
investment vehicles--bank savings, certificates of deposit, retail money market funds,
and all long-term mutual funds--was $744 billion, which is $296 billion
more than the additional money the U.S. would spend each year on oil if
the price of oil rose by $60 per barrel from its current level.
From April through June, the inflow into savings and investment
vehicles was $35 billion per month, down 43% from $61 billion per month
in the same period last year. In other words, the U.S. will generate
almost no savings if the price of oil stays at $135 per barrel. If the
price of oil rises even modestly from its current level, the U.S. will
be operating at a deficit.
If regulators raised the margin requirement for oil futures to 25%
from no more than 7.5%, the oil market would crack. Unfortunately for
oil users, regulators are unlikely to boost the margin requirement,
unless outside pressure becomes unbearable, because the income of
commodity exchanges and traders would plummet.
But there are two other solutions to the oil crisis.
The first is requiring major players in the oil futures market to
disclose their total positions of all kinds in crude. Given the
importance of oil to the U.S. economy, everyone should be able to know
who is going long crude oil in a big way. Institutional owners must
report what stocks they own at least semiannually. Why should they not
be required to report the amount of crude oil they are long?
The second solution is for oil consumers to make a concerted effort
to go short oil futures. The U.S. government has been spending $280
million per month, pumping 70,000 barrels of oil per day into salt
caverns. Instead of buying oil, why not go short 35,000 contracts
monthly at $8,000 per contract, in other words selling high the crude
we bought relatively low? What if other major crude oil users also went
short oil futures each month? What if the Japanese government,
airlines, trucking companies and utilities spent several billion
dollars to go short oil futures each month until the oil market came to
its senses?
It is insane for the world to go broke while oil traders and a
handful of gangsters who control their national oil production make
huge fortunes.
Excerpted from the current issue of Trimtabs Weekly Liquidity
Review. Charles Biderman is founder and CEO of TrimTabs. For more
analysis and more detailed market liquidity data, visit TrimTabs.com.
posted on June 25, 2008 8:14 AM ()
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