I added to my SCO position today for $35.01.  This purchase wipes out all of my cash and leaves me with a small margin balance.

If this goes awry, I will very likely fold (at least partially).  I already semi-folded a few months back if I were to be honest with myself, by scaling back all of my long positions and completely liquidating AWK and BG.

I’m not messing around with margin.  I might hold this particular portfolio balance for bigger losses than prudent, but I’m not going 2X leverage.

That’s just insanity.

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I understand that I am playing the part of the broken record.  But bear with me, because I wouldn’t be doing it if I wasn’t convinced that I’m right.

I actually have a long track record of sucking up and admitting when I’m wrong.  I’ve taken plenty of losses on bad decision, with my chin up and looking those who follow me squarely in the eyes (my eyes see vicariously through my penmanship).

So rather than shouting over me, citing price action as your only reference, hear me out.

Those who are long oil have 5 basic arguments, that I’ve heard anyway:

1)      Supply of oil has never been this tight.

Counter: maybe.  That depends on how you define the purchases of oil that have been creating the perception of a constrained oil market.  While it’s very true that for the past 6 months, all oil that has arrived at market has been getting snapped up, the bigger issue is who’s buying?

The quantity of oil being purchases by non-industrial consumers (think GS storage facilities) has accounted for a large portion of these purchases.  I don’t have time to track down the exhibit, but in your free time, look up how much of recent oil sales have been by people who don’t actually use it for anything.

So we must ask ourselves; does oil that is being stored privately not count as stored oil?

I feel there’s probably a massive stock of shadow inventory of oil, which will likely hit the market should any significant selloff materialize.

2)      The Middle East is subject to instability

Counter: Pardon me, but when hasn’t the Middle East been in turmoil?  The only time that region seems to be devoid of violent uprisings is when its residents are being oppressed by a dictator.  We’ve had the same looming threat of violence for over fifty years now.  Yet, in all that time, we’ve managed to maintain our strategic interests.

You’d think we’d have some faith, by now, that we know what we’re doing and how to handle these people?

We’ve got more naval carriers in that region now than ever before.  And when they say “naval carriers”, what is actually being referred to is “a fleet of warships with a naval carrier amongst them.”  We’ve got nuclear warheads.  We’ve got battleships.  And, we have minesweepers.

At some point, you’ve got to trust that Iran isn’t going to put its head in the lion’s mouth and start slapping it in the eyes.  How could they close that channel, with its narrowest region of 30 miles wide anyway?  If they try, we’d be forced to enact a five mile deep “dead zone” along the entire length of Iran.

3)      Cheap oil is harder to find

Counter: True, but that in and of itself does not justify higher prices.  Just because the newer oils that are being extracted from tar sands and such are not feasible at prices below $70 (or so, I don’t know the specifics) doesn’t mean all oil needs to trade at those prices. 

Especially if demand for crude drops far enough to be fully satisfied without these newer, more expensive sources of oil, then competition will very likely force old fields to lower prices below where new fields can compete.  Why wouldn’t they?  The alternative is lower revenue from lower volumes anyway.  If lower prices enable higher sales, then there’s a range of volume that will give you more net revenue.

Net revenue is what really matters.  Profit margins are meaningless, if you’re laying off half your work force.  The cheaper oil will take the bids, the more expensive oil will be idled.  That’s the way it is.

The presence of a more expensive source of oil is no justification for higher prices on its own.  Case in point; electricity is much more expensive when generated from wind or solar than from coal or gas.  By any measure, energy costs significantly below $10 kW/hr makes the alternative energy sources unprofitable.

So electricity should be $10+ kW/hr to accommodate those production methods?  I didn’t think so.

4)      Big oil exporters need $100 oil to avoid running a budget deficit

Counter: Yeah, and I need a billion dollars to…you know…buy stuff.

I don’t care what oil exporters need to maintain their expenditures.  Greece needs debt/GDP below 100%, but how’s that working out for them?

This argument rests on assuming that oil producers, particularly the OPEC cartel, have some sort of mysterious power over pricing.  It’s superstitious, and naïve.

If anything, I’d argue that right now, oil producers have less control over the price of oil than ever before.  If oil drops below $100 a barrel, these nations will start bleeding deficits.  They will risk internal uprisings, sure.  Especially the Saudis, who are basically bribing their citizens to not rise up.

But the traditional mechanism for raising the price of oil is cutting production.

Tell me, if the Saudi’s need $100 oil at their current production targets just to meet their expenses, how can they afford to cut production to keep prices high?

This argument seems to hinge on assuming that if Saudi Arabia’s budget gets busted, then total anarchy will ensue and we’ll somehow lose the country.

But oil exporters have been running a surplus for, like, 30 fucking years.  Do you really think they’ll just cave?  Or maybe, just maybe, they’ll spend some of the hundreds of billions they have in sovereign wealth funds around the world to stave off judgment day…?

Yeah, I think they’ll be just fine for a while.  People are looking for safe fixed income investments anyway (Islam’s outlaw of interest aside, there are still ways to make set cash flow from investments in those places). 

Running a deficit (the first in practically ever) is not going to usher in the end times in the Middle East.

5)      Globally, central bankers are devaluing their currencies

Counter: And this is the final argument.  The big devaluation…

But it alone doesn’t add up.  Prices aren’t just a function of outstanding currency.  They’re more a function of credit.  And at these input costs, companies are going to be very reluctant to take on debt.

Credit has been contracting across the globe.  Savings continue to weaken.  These things are all interconnected.  The state of the consumer and business will in turn affect the amount of credit outstanding.  Lower credit, lower velocity of money, and thereby, probably, lower prices also.

Credit contraction is as much a function of higher prices as printing should be aiding credit expansion.

Besides, oil is priced in dollars, not euros or yen (for now).  Unless you’re all pricing in that changing sometime soon, the recent strength in the dollar should be very concerning for those of you who are long crude oil.  Foreign nations easing should actually be hindering your bets, not aiding them.

That about sums up the “higher oil” arguments I’ve heard.  And I just don’t see anything here to is going to give the push that some of the banks are using to call for $150 per barrel.

But what I still see, everywhere, is heavy demand destruction.  Assumptions about crude demand from emerging markets, and most recently the US, have been way off mark, to the high side. 

India and China were two of the earliest justifications for higher prices; yet I can’t help but notice that no one’s talking about them much lately.  On to bigger and better reasons to buy oil?

And, as I’ve consistently noted, Europe is getting sucked into a vortex.

On the back of foreign demand, US demand I would question.  We’ve now had two MASSIVE builds of crude inventory.  And remember, I believe the amount of real stored oil in the US is already being characteristically undercounted anyway.

Throw in continued export weakness and a sudden shift in sentiment could easily break oil markets, sending crude back into the $70’s (or lower) as a wave of shadow inventory comes to market.

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I’ve discovered the glory that is smoked paprika.  Yesterday afternoon, we had a smoked pork shoulder, seasoned in this wonderful spice, plus a few other choice flavorings.  The results were remarkable; I’ve got the urge to start rubbing the stuff on every cut of meat I’ve ever sampled, just to see what it does.

The 9^th floor is starting to reveal a lull coming.  I wouldn’t say I’m less busy at the moment; I’m still rushing to get things done.  But for the first time in a while, I can start to see light at the end of the tunnel.

One of these days, I’m going to finish a process, reach over to grab the next document on my desk, and find my hand comes up empty.  It will be, without a doubt, satiating.  It’s hard to believe that barely more than a year ago, I was sitting around doing nothing.

So, how about those manufacturing numbers out of Europe, eh?  Coupled with the GDP numbers, the employment numbers, the deficit numbers, and just about everything else I have seen, I’d say there won’t be much left of Europe in another couple of months.

Atlantis?  Pssh, step aside…

The problem for us and Europe is that, while the economies in Europe are definitely contracting, their costs are simultaneously ramping higher.  This makes easing a very difficult maneuver for them.  It also means that their economies will likely continue contracting until something breaks.

My guess: foreign currency holders start asking why the hell they’re holding onto euros if Europe’s manufacturing (sometimes called “stuff you actually buy”) continues to evaporate.

How I see the next few months playing out is something as follows:

1.  As EU stealth printing (LTRO, ESM, EFSF, etc.) starts to show a multi-trillion dollar nightmare and currency traders realize this is just to keep things going as they have been (contraction), the euro will be sold heavily against the dollar.  EURUSD goes to 1.00.

2.  The exchange rate damage this causes is dreadful, as Europe’s trade partners take a massive exports hit.  The US sees all recent growth exenterated.  China’s GDP slams towards zero and their loans start blowing up.

(HAHAHA. A quick aside, have you looked at China’s claims on loan losses?  Apparently the banks discovered a few million “high quality” people they could write loans to who are expected to default at a fraction of the rate of the rest of their portfolio….enabling them to hold much less in loss reserves and claim significantly more cash flow as income.  SURE, and I just found El Dorado.  Those loans are fucked…)

3.  And finally, we get a significant correction, exactly as we have for the past two years in a row.

But this time, you can bet I’m out of all shorts before September.  What we’ve seen, consistently, is central banks letting commodities take a hit so that the blood of traders can give them ground to ease further.  I’m not betting they don’t print more money.  I’m just betting we bleed again first.

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How the shit is gasoline not part of core inflation?  What in this country is even produced without the price of oil attached to it?

You thinking of walking those hand knitted sweaters from Tennessee to Chicago?  You know, the ones you made out of that wool that came from those sheep which live off the grass in your yard you don’t mow.

Economists and banks desperate for more free money seem to be getting aroused on the prospects of lower meat and vegetable costs, since they have equated lower prices to free dollar showers.

But let’s be honest; saying the cost of meat is down isn’t really that useful.  Logistics matter.  Where is all this cheap meat?

You go tell some starving kids in Ethiopia about all that cheap food we have in the developed world.  Or maybe let some freezing asshole in Siberia in on all the free natural gas we have here in the U.S.  See how appreciative they are.

And every component of logistics in driven by the cost of…wait for it…fuel.  The cost of oil matters to the real costs of goods…that’s gasoline and diesel prices.

Tap water may be free in Europe but, looking at their gas prices, free water isn’t coming soon to a Sahara near you, if you follow me.

Which is all that really matters.  It’s why Bernanke has been talking a big game, yet stays glued to the sidelines.  He can pretend like costs are down all he wants, but when the whistle blows, we’ll see how that philosophy works out, now won’t we?

Close your eyes and imagine this; a human sized gas can with a face and eyes, holding a shocked/terrified expression while a commodity trader holds a gun to its “head.”  You can imagine Bernanke there too, with his arms raised to the sky, while he exasperatingly tries to talk the gun-wielding dollar-shorting maniac down.

That’s what I would draw for you, if I didn’t suck at drawing caricatures.

That’s where things are right now.  It’s why QE3 isn’t coming.  And it’s why nobody should care that there’s subdued inflation everywhere but where it counts.

But hey, you doubt me?  Go buy some of that awesome, cheap crude oil they have stored in Cushing, OK.  You can always sell it in Chicago or New York, after all.  You know where that’ll get you?

Stuck in the middle of fucking Oklahoma.

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Yesterday, a most wonderful thing happened. For the first time since environmentalists initially lost their nerves with nuclear fuel, more than thirty years ago, a new nuclear power plant has been approved for construction right here in the U.S.

A new nuclear power plant is being constructed less than one year after the most high profile nuclear disaster since Chernobyl, or 3 Mile Island.

Already, the naysayers are out in force. I don’t blame them, as personally I was never interested in nuclear power until very recently when I started hearing that portion of the crowd (you know the ones) saying nuclear energy production would somehow cease to exist.

But whether or not this ushers in a nuclear renascence is irrelevant. Where we are, as a planet, is to acknowledge that nuclear energy is simply not going away. It will have a place in the future, alternative options notwithstanding.

Also, remember that much of the cost associated with building nuclear energy is legal and circumscribed in nature. Having a project deadlocked for decades while costs of filings and lobbying and assessments pile up certainly effects the end cost of the energy. How does the cost of building a plant, free from having a hundred different activist groups shoving lawsuits your way, compare with building one otherwise?

What does the cost look like when the government isn’t impeding the entire length of the process?

Besides, energy diversification is important. Sure coal and natural gas look like tantalizing and superior alternatives now. But what about when the push to design systems that use those energy sources goes into effect? I don’t believe costs will stay low, especially if you start to see natural gas power plants popping up around the country. And especially not if Obama follows through with his natural gas marketing and actually tries to take it somewhere…

More importantly then: (1) nuclear power is not dead AND (2) the supply constraints for uranium very much present before Fukashima Daichi will persist.

And accordingly, CCJ will soon see its day in the sun.

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BEIJING/LONDON (Reuters) – China is scouring the world for alternative oil supplies to replace a fall in its imports from Iran, as it seeks to negotiate lower prices from Tehran, and has been drawing heavily on Saudi Arabia.

Industry sources told Reuters that Beijing had bought the bulk of an increase in crude oil supplies from top oil exporter Saudi Arabia in the last few months.

The world’s second-largest oil consumer is also importing more cargoes from West Africa, Russia and Australia to replace reduced supplies from Iran.

China is the top buyer of Iranian oil, taking around 20 percent of its total exports, but since January it has cut purchases by around 285,000 barrels per day (bpd), or just over half of the total daily amount it imported in 2011.

Saudi Arabian output reached 9.76 million barrels per day (bpd) in December, up 360,000 bpd from October, OPEC data show, and has remained near that level in January, according to a Reuters survey. Several sources in the oil industry said China has bought a good part of the extra oil.

“On average, Saudi exports went up by 200,000 barrels per day and this went to the East, overwhelmingly to China,” said one of the sources, a senior executive with the trading arm of a U.S. oil company.

Look at what’s happening right under your nose. The world is changing, and for me, that’s for the better. The days of oil importing countries fighting one another tooth and nail to secure oil reserves are coming to an end.

It helps when the biggest oil importers also seem to have the biggest standing armies.

Why have we been letting OPEC set oil prices for this long, while a good portion of the proceeds go to causes directly pitted against us? There’s no reason for that sort of thing.

OPEC may control a huge chunk of the oil production, but we control the oil consumption.

Their fields are low maintenance and the recoverable oil is cheap. There’s no reason we should be paying Iran $100 a barrel when their costs are $10 (or whatever they really are). Especially since lots of that money is just flooding back into their weapons programs.

Here’s a better idea: the U.S., China, and Europe divide up the planets oil strategically, so that these places either provide the goods at lower prices to one or fewer consumers, or else they can see their net income from oil exports plummet perilously, sending their people into violent rampages.

Farfetched? What else was Geithner doing in Asia this whole time?

It’s happening as we speak. China is putting on a grand performance, demanding the West leave its super-best-friend Iran alone, and threatening WW3. But at the same moment, they are proceeding very delicately, setting up to knife Iran in the back and mow them over on the way to their energy needs. Who will over bid them; the EU? America?

A million Chinese boots will soon be high stepping over Khamenei’s backside.

The days of putting open with the OPEC oil trust are coming to an end. Those countries have become too dependent on their oil revenues. They cannot afford to cut production, and therefore cannot afford to force prices higher.

OPEC won’t be missed.

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