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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
WEDNESDAY, 5 SEPTEMBER 2001 

 

Today:  Black Gold Outlook

*** By gum, that ol' bull was right... better watch his 
step...

*** Dow still below 10k... says the good Dr. - the 
dollar has room to move... down, down, down...

*** Tech's future's is bright, but what about 
profits?... the band gets hailed back for an encore... 
heck, anything's possible... 

*** Let's see, Ol' Ferdinand - our latest bull market 
indicator - was spotted in the north part of the field 
in the early morning...but then he wandered back towards 
the middle.

*** Sure enough, Ol' Ferdinand was right. Stocks soared 
in the morning yesterday....but then came back, with the 
Dow closing just 47 points ahead and still under the 
10,000 mark.

*** The Nasdaq closed down 34 points.

*** For those who watch such things, this is not 'good 
action.' Investors must have been so eager to get out 
that they sold into the morning's powerful rally. But 
who knows...we'll have to keep an eye on Ol' Ferdinand. 
He's as good an indicator as any.

*** This morning, I note that the old bull is grazing in 
the south section of the field, next to a group of cows. 
Look for falling stock prices today. (I'll warn 
Ferdinand that if he gets this wrong, he might soon be 
filet mignon.)

*** On-line sales fell again in the 2nd quarter. On-line 
retailers took in fewer dollars and a smaller share of 
total retail revenues. 

*** "The Internet is great for investors," wrote Doug 
Casey two years ago. "But it will be a graveyard for his 
capital." I reported Dr. Richebacher's comments 
yesterday - noting that the entire technology sector was 
losing money. And now comes a study done by former 
Treasury Secretary Larry Summers that confirms Doug's 
intuition. 

*** "The paper, written along with economist Bradford 
DeLong, was prepared for the weekend's top-level 
gathering of central bankers and economists.

*** "The future of the technology is bright; the future 
of the profit margins of businesses-save for those few 
that truly are able to use economies of scale to create 
mammoth cost advantages-is dim," it concluded.

*** "This means that in the long run, consumers will 
reap large benefits from the technological revolution, 
but that the path may be rocky for investors...Consumers 
will gain, and shareholders will lose," the paper said. 

*** Shareholders have already lost an amount equal to 
half the nation's GDP. Between $4 and $7 trillion have 
disappeared from stockholders' net worth since the crash 
of the Nasdaq and the beginning of the bear market. 

*** Yesterday, the Dow rose, but losses in technology 
continued. Our 'river of no returns' stock, Amazon, 
dropped below $9...Cisco slipped below $16. 

*** The dollar rose handsomely yesterday - ending the 
day up to 88 cents per euro. So far, the dollar has 
resisted our efforts to guess when it might fall...

*** "The dollar will lose at least 20% to 30% of its 
value against the euro," we recall Dr. Richebacher 
saying over the weekend. Dr. Richebacher was right about 
the tech sector and the Nasdaq. We think we will be 
right about the dollar, too. Dr. Richebacher, of course, 
has some thoughts on what you should do if you're 
planning to profit from the situation... if you're 
interested in hearing more, please see the special 
report our staff has prepared, click here: 

The Inevitable Crash Landing Of The US Economy
http://www.agora-inc.com/reports/RCLF/FastProfits/

*** Last night, we came to the end of the series of 
conferences and seminars out here in Ouzilly. Thom, the 
other musicians, and I got together and did a few songs 
for the group. We sang 3 or 4 songs and then signed off. 
'But the crowd cried out for more,' as Percy Sledge put 
it. It was the first time we were ever asked for an 
encore! Hmmm....maybe it's time to quit our day jobs and 
go on the road. 

*** But wait...what about all those hotels...the 
booze...the drugs...the groupies? Hmmm, sure sounds 
better than watching the stock market for a living. 

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The Daily Reckoning Presents: A Guest Essay 

Stepping up regulation, OPEC is making itself the 
"energy Greenspan." But investors take note: Given 
uncertainties in the Middle East, controlling prices 
this winter may be an impossible dream. 



BLACK GOLD OUTLOOK 
by Jay Akasie 


There is no apparent reason to expect higher crude oil 
prices anytime soon. But neither is there any apparent 
reason to expect them to slide. "Range-bound" is the 
choice term among the black gold experts with whom we 
spoke. This tepid and agreeable forecast may pan out. 

Then again, tepid goes with oil about as naturally as 
does water. Less-than-obvious reasons abound for a price 
move, both in the near- and long-term. And investors are 
well advised not to forget the Middle East, that mother 
of all wildcards. 

The late 1990s gave the world rock-bottom oil prices 
while giving OPEC members serious economic stress. 
Determined to exert more control, OPEC now meets about 
as often as the Federal Reserve Board to regulate its 
output and keep prices within its window of $22 to $28 
per barrel. 

Just this month, OPEC halted a modest oil slide by 
announcing a million barrel-a-day cut effective Sept. 1. 
"Being range-bound keeps OPEC countries very happy," 
says Jeffrey Pittsburg, an oil analyst at Pittsburg 
Research.

Cutting output by one million barrels a day could be 
just the catalyst to drive prices near $30, especially 
by December, says Aaron Brady of Energy Security 
Analysis, Inc. The world crude oil market is already 
headed toward a deficit this winter, which the September 
OPEC cut is bound to influence even more. Also on the 
side of short-term higher prices is a large speculative 
short position in crude oil. Brady points to a 
Commitment of Traders report indicating that early this 
month the Non-Commercials (speculators) had built up 
their biggest net short West Texas Intermediate (WTI) 
position since the collapse of oil prices in 1998.

In and of itself, this large short position is not 
automatically significant. But if prices begin to move 
higher for any reason, short covering could amplify the 
move. "If OPEC is successful in driving back the price 
up, then you'll have the additional effect of short 
covering going on," said Gareth Roberts, chief executive 
of Denbury Resources, a large oil and gas producer. 
"It's OPEC versus the NYMEX. When OPEC says we're going 
to shorten some production they're squeezing the shorts. 
Something has to give somewhere."

Veteran oil analyst Tom Petrie, co-founder of Denver's 
Petrie Parkman & Co., says that futures markets tend to 
influence oil prices when supply and demand conditions 
are tight. "There are times you can argue that the tail 
wags the dog when it comes to the futures markets," he 
says. "That's where OPEC's intervention can put a floor 
under it. When times are tight, the great commodity 
traders can have some influence. They certainly affect 
perception and psychology, which can then enter into 
OPEC's calculations and mindset."

If short-term trading can influence prices, so can long-
term demand trends. To be sure, sluggish economies have 
slowed their demand for oil this year, but demand 
nevertheless continues to grow. 

Gasoline prices have inched up on news that inventories 
dipped for the seventh week in a row. Scott Inglis, 
managing director of First Energy Capital Corp., an 
investment firm focused on the Canadian energy sector, 
points out that talk of economic slowdown has not done 
much to hurt gasoline demand in the U.S., which has 
remained remarkably strong throughout the summer. 

First Energy recently lowered its forecast for global 
crude oil demand growth to 0.6% in 2001, down from its 
long-predicted 0.8%. An Asian slowdown and higher oil 
prices have dampened demand throughout the region. In 
fact, all of the major oil-consuming markets are 
discouraged by the fact that WTI prices have hovered 
above $25 for more than 18 months, the first time that 
has happened since the mid-1980s, according to Inglis.

But don't count out the emerging nations. A study this 
month by the International Energy Agency shows that 
crude oil demand by the OECD countries dropped 0.5% 
year-over-year in May, and early data suggest that 
demand might drop off even faster in June. But thanks to 
rising developing world demand, the IEA predicts that 
global oil demand will still grow by 0.5 million barrels 
a day this year and 0.8 million barrels a day in 2002. 

It is important to note that non-OECD oil demand has 
consistently exceeded IEA forecasts. Acknowledging this 
fact, the agency estimates that if past is prologue in 
2001 and 2002, total world oil demand could rise an 
additional 0.4 million barrels per day beyond the IEA's 
current forecasts. In other words, expect an upside 
surprise on the demand side.

Because OPEC, which accounts for more than 40% of the 
world's output, is determined to monitor "range-bound" 
prices, the expectation is that oil prices will hover in 
the mid-$20s well into the winter. But Inglis says that 
every time he forecasts oil prices, OPEC surprises him 
with a cut to hold prices a bit higher. 

The group of 11 has also been extremely proactive in 
making cuts well ahead of when it needs to, he says. 
"We're predicting $26.25 for the rest of this year, 
which looks a little light now because of the recent 
OPEC cutbacks," says Inglis. "But somewhere in the $27 
range is probably where it shakes out." 

A new era of constant OPEC supply-tinkering is a 
response to a more unpredictable world, not the cause of 
it, says Tom Petrie. "In making its changes more 
frequently the idea is to diminish volatility, not 
increase it," he says. OPEC has been successful of late, 
but it's a delicate balance. Indeed, the regulation of 
the bulk of the world's oil supply is in some respects 
analogous to the regulation of money supply by the Fed, 
according to Petrie. "In the same vain that Alan 
Greenspan has become the master of gradualism, OPEC is 
looking to do something similar," he says. "The 
comparison is irresistible: The two life bloods of 
economic activity are money supply and energy and OPEC 
is in a sense the world's Fed for energy supply."

Denbury's Roberts says that OPEC used to take a stab at 
what amount of oil the world would need for the year and 
produce it at that rate. And the western world would 
store the oil. By the time the Asian crisis hit in the 
late 1990s, the perception that there was a world 
oversupply drove prices down dramatically, a lesson OPEC 
never forgot. 

He, too, likens OPEC to a kind of Federal Reserve for 
the world energy industry, meeting almost monthly to 
tweak production numbers in an effort to keep crude oil 
around the $25 per barrel mark. "What OPEC is doing for 
the first time is trying to manage the inventories 
around the world by adjusting their output," says 
Roberts. "They've never done this before. It's most 
unusual."

Just as forces in the near and long term have the 
potential to jolt OPEC's precious target prices out of 
range, so can a wildcard: growing violence in the Middle 
East. Of OPEC's 11 member countries, five are in the 
region and another three are fellow Muslim countries. 

We say, expect the unexpected. Despite OPEC's 
considerable influence, it's a reasonable bet that the 
cartel will not maintain a perfect supply and demand 
balance in the oil market. Most likely, oil prices will 
test the high end of the target range sometime this 
winter. Oil demand continues to surprise on the upside, 
both short- and long-term. 

Toss in a Middle East that is becoming less peaceful 
every day and suddenly, oil looks like one commodity 
that is better bought than sold at current prices.

Regards, 

Jay Akasie
for The Daily Reckoning


Jay Akasie is a writer for grantsinvestor.com and a 
regular contributor to The Daily Reckoning. As a reader 
of the Daily Reckoning you are cordially invited to try 
grantsinvestor.com for 30 days - free. Please click 
here: http://www.grantsinvestor.com/agora.html



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About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.

 

 
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Last modified: September 06, 2001

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