Monarchist Vs. New Capitalist
One is a closed, monarchical system; The other, a system
open to and prospering in free-market capitalism. Both are highly
dependent on oil revenues, and as a pair, form the number one and number two
largest producers of oil in the world.
But the comparisons may end there and understanding
the differences Saudi Arabia and Russia’s oil exigencies may shed some light
on whether the major oil exporters will be successful in setting the price
of world oil. The Saudis want to resolve the oil price crisis by
controlling global supply. Running at only 85% of capacity and with a lower
cost of production, Russia, the number two world producer, seems bent on
making up any revenue shortfall from falling prices by hiking output — and
usurping market share.
The world’s largest exporter, Saudi Arabia, wants
OPEC and the major non-OPEC exporters like Russia to cut production. But
Russia likes the revenues it gets from its six major producers and may not
have the political will, nor even the political power to limit the maverick
entrepreneurial oil companies from increasing output. Indeed, the two
biggest, Yukos and Sibneft, both plan double-digit rates of increase.
If history is any gauge, global price collusion works
for a time, but eventually breaks down as the temptation to
“cheat” on collusive output and price agreements — both in
high-price good times and below-production-price bad times — is always
high. OPEC too has a spotty record of enforcing output quotas among its
members and the breakdown in adherence to quotas by members was a chief
reason oil dropped to nearly $10 a barrel less than three years ago.
So herein lies some of the political and business exigencies
of the world’s top two producers. If Russia refuses to cut output, OPEC says
it will not curb its membership’s output, resulting in a price war. Norway
and Mexico, the other non-OPEC players, express they are making headway
convincing renegade Russia to cut production. But Russia is just getting its
footing as a successful capitalist economy and generates half of its export
income from oil and gas. Like a good capitalist, Russia is saying rather
clearly, “Hey, let’s compete,” and may have more incentive to do
so rather than cooperate with its vast natural resources that expand over 11
time zones.
Russia still makes money at $16 a barrel, so this
suggests it will only cut production when oil prices drop somewhere below
that level. This, in turn, suggests oil prices will bleed down to somewhere below this
level before they stabilize.
But energy prices rallied today on hope Russia will
collude to trim output by about ten times more
than the 30,000-40,000 “token” barrels it recently
proffered the oil oligopoly. Any pullback from lows might provide shorting
opportunities. January crude
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heating oil
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unleaded gasoline
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Natural gas
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gapped higher out of its strong finish this morning, making good for a third
day on its
Turtle Soup Plus One Buy setup. Nat gas also sold off and recovered from its
strong opening, leaving a tail next to an expansion bar, a very constructive
setup.
In financial futures, traders trimmed stock and
dollar-asset position, working to send
December
dollar index futures
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shorts delayed more selling.
As mentioned in last night’s Tuesday’s
Futures Setups, “Currencies have souped again,” or made
Turtle Soup-like setups. The setups suggested the dollar would fall and
Japanese yen
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British pounds
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euro FX futures
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Swiss francs
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Turtle Soup Plus One Buy page, opened right at the trigger and made good on
their setups for average gains. Dollar index futures closed down .33 at
116.81.
Despite strong finishes in the three major equity
index futures last night,
December Nasdaq 100 futures
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S&P futures
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lapped down on the open and ended up underwater. Today, and for the past
three days, the indexes have been flashing that they were overbought and due
for a reversal with the Market
Bias Indicators Page registering at least four down signals since last week.
The pullback today is coinciding with the lightening of positions ahead of
the long weekend and a lightened trading week.
December gold
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slightly higher-to-flat prices, settling up .3 at 273.2. This contract is on
the
Implosion-5 List and has broken its head-and-shoulders neckline.
T-bonds
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point after a one-day reprieve, making it seven down days in the past eight.
This market is holding at just under the 50% retracement of its six-month
rally. Basis December closed down 1 10/32 at 104 30/32.