• 99 days Could Crypto Overtake Traditional Investment?
  • 104 days Americans Still Quitting Jobs At Record Pace
  • 106 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 109 days Is The Dollar Too Strong?
  • 109 days Big Tech Disappoints Investors on Earnings Calls
  • 110 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 112 days China Is Quietly Trying To Distance Itself From Russia
  • 112 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 116 days Crypto Investors Won Big In 2021
  • 116 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 117 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 119 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 120 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 123 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 124 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 124 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 126 days Are NFTs About To Take Over Gaming?
  • 127 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 130 days What’s Causing Inflation In The United States?
  • 131 days Intel Joins Russian Exodus as Chip Shortage Digs In
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

The Casey Files - Who's Keeping Oil Down?

I recall asking my father, many years ago, his opinion on some matter of world affairs. He was a man of broad knowledge and experience but few words-at least when he was talking to me. His answer was: "It's all a matter of economics." Cryptic, in that it didn't answer anything, but profound, in that it answered everything.

A couple of years later I asked him another question, on another big topic. His answer was: "It's all a matter of psychology." Both answers were absolutely right, of course, and equally applicable to every field of human action.

It would be so much neater if I could just leave it at that but, at about the same time I received the "psychology" answer, I was talking with a Sgt. Major Max Trujillo about a related question. Max was quite philosophically inclined, especially for someone with his background. His answer was: "It's all a matter of semantics."

The fact of the matter is that all three answers are correct, depending on the circumstances you are confronted with.

Which brings us to the following essay by Dave Forest, editor of our Casey Energy Speculator. As you'll read, he has come across some interesting data that suggests that politics may have more to do with the recent pullback in oil prices than meets the eye.

And, as we all know, politics is just an extension of psychology.

Doug Casey


Who's Keeping Oil Down?
By Dave Forest

Oil had energy investors reaching for the Tums the last few weeks.

After crude tagged a record intra-day high of $78.40 on July 14, it drifted lower through the end of summer and on August 29 closed below $70 for the first time since June 20. On September 4, the sell-off accelerated: WTI closed at $68.60 and continued falling throughout the week, finally bottoming below $61, a price that hadn't been seen since March 10.

Along the way, it helped pull the TSX Venture Exchange -- which tends to live and die at the hands of energy and resource stocks -- down more than 10%.

So, what happened? Mainstream financial media blamed crude's tumble on everything from Iran playing nice with the U.S. to a so far hurricane-less hurricane season in the U.S. Gulf of Mexico. But any intelligent observer can see that the fall was too hard and too sudden to be caused by these factors alone.

More than anything, this sell-off looked like it was caused by seasonal and technical factors. Crude is almost always weak in the fourth quarter, and the price had gotten ahead of itself in recent months -- not surprising, given Israel and Lebanon going to toe-to-toe.

But the timing of oil's decline also coincides with another event: U.S. mid-term elections. Although these two things sound unrelated, oil and politics in fact go hand in hand. In fact, there is an eye-opening correlation between U.S. president George Bush's popularity and American gasoline prices over the past four years. As the chart below shows, the higher the price at the pump, the more people think of Bush as a chump.

Which begs the question: with elections looming, might the Republicans be trying to bring down oil prices (and therefore gasoline costs) in an attempt to cull favor at the polls?

While we're generally skeptical of conspiracy theories (after all, if the government can't deliver mail on time, how could it organize a large-scale covert action?), it's a known fact that the feds have several mechanisms by which they could nudge crude lower.

The Strategic Petroleum Reserve, for one. Release of crude from this stockpile helped push oil prices lower last fall in the wake of hurricanes Katrina and Rita.

Another lesser-known influence on oil prices is the "crack spread." This is the difference between the price that oil refiners pay for crude and the price they receive for the gasoline they produce. Put another way, it's the profit margin that refiners make on their products.

Currently, the crack spread is at -- in the words of the U.S. Energy Information Administration -- "unusually low levels." This means that refiners are selling gasoline for little more than the cost of the oil they purchase. This makes no sense from a business perspective... generally in such a situation, refiners would simply up the sales price of their gasoline, improving their margins.

However, it does make sense if the refiners are purposely attempting to keep a lid on prices.

Why would these companies voluntarily take lower profits? There's no way to know for sure, but it's a certainty that the White House and Big Oil are close friends. Witness Dick Cheney's ties to Halliburton, and George Bush's background in the Texas oil patch. Might the Republicans be calling in a favor from their refinery manager pals, asking them to keep gas prices down until November 7 has passed?

Of course, there's no way to prove this. But for energy investors, it's worth considering. If gasoline prices are being artificially depressed, we can expect a rebound during the last few weeks of the year. Which -- judging from the historical relationship between gasoline and crude -- would lift oil prices, and therefore oil stocks. If such case does present itself, now might be the time to buy oil producers, many of which are selling at fire sale prices. This is a story we will, naturally, continue to follow in the pages of the Casey Energy Speculator.

Don't miss the follow-on story, as well as multiple other energy play opportunities poised to double or more in 12 months, it could cost you! Click here to sign-up for a 6 month, risk-free trial subscription to the Casey Energy Speculator and learn for yourself why Doug Casey is one of the most respected natural resource speculators in the business.

 

Back to homepage

Leave a comment

Leave a comment