Original post:
I have very mixed feeling about Mr. Verleger.
I am naturally suspicious of anyone who spends as much time on self-promotion as he does. On the other hand Craig Pirrong seems to respect him and, although I don't have much interest in Pirrong's snark, the Prof. probably knows as much about commodity storage as anyone.
Storage, being the nexus between physical and financial, is the aspect of the commodity biz that matters most so anyone who can instruct me is jake in my book.
From Dizzynomics:
From the WSJ, a view based on the recent writings of Philip Verleger:On that last point Mr. V., in his latest Notes at the Margin agrees with Ms. K:
Energy economist Phil Verleger estimates that with short-term interest rates around 0.25%—roughly in line with Libor—the financing cost of holding stocks today is around two cents a barrel every month. Right now, three-month oil futures trade at about a 30 cents a barrel premium to the spot price. On that basis, assuming 90% leverage, an investor could buy oil and sell it three months forward, earning a 2.5% return after costs. That might not sound like much. But it is five times the yield on three-month U.S. Treasurys and a no-brainer for a trader at an oil firm with access to storage capacity.What I didn’t mention in my own piece about Verleger’s revelation is that I have had a long-running email dispute with him about this very topic since at least June 2012. It was sparked by my “scarcity amid plenty” post. Verleger’s position about speculators and commodity financing influence has always been very clear. He has always maintained they do not impact prices or inventories in the physical market.
I on the other hand have been noting that mass inventories, which resulted from a mispriced curve, have been giving the market an incentive to hoard wealth in commodity form rather than in deposits since at least 2008. This is because the return is better than in the money markets (and the asset is just as secure). The entire trade has been facilitated by passive speculator types who have been sold the story that commodities will offer a diversified inflation hedge. All of which has skewed market signals giving the impression that demand is greater than it really is.
Even now Verleger is only half way there though. Yes, low interest rates increase the incentive to hoard. They have always done so. But it’s the fact that the commodity curves have for the longest while been mispriced relative to money curves that has exaggerated the phenomenon. And that is purely down to the effect of speculators on redundant stocks.
When speculators stop compensating the market to hoard one of two things will happen: 1) stocks will be liquidated because hedging is too expensive 2) hoarding will continue as long as the commodity hedging cost is lower than the negative rate that can be achieved in the market....MORE
...At some point in the next twelve to eighteen months, US stocks will drop rather sharply. One should anticipate liquidations of as much as three hundred million barrels of crude and products when "normal" conditions return....Update: A very sharp physical oil trader points out that the above timeframe is rather wide enough to drive a tanker through without touching either side of the bracket and sends along a couple of Mr. Verleger's public predictions:
From Bloomberg:
Verleger Sees $20 Oil This Year on ‘Devastating’ Glut (Update1)That's dated July 16, 2009 with the front futures at $61.18. Oil had bottomed the previous December at $32.40. and besides not going to $20 it never traded lower than the day of the prediction, closing the year at $79.36.
More recently, 2012 we have Foreign Policy mag via NPR:
Foreign Policy: The Coming Oil Crash
...Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup's Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger's forecast is even gloomier — a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez — $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, "$35 or $40, or even $60 a barrel, would be devastating fiscally," says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his "popularity and authority are closely correlated with economic growth," Kuchins told me in an email exchange....MOREThere's nothing wrong with making a mistake, I do it on the blog all the time and even more often in the higher risk-hopefully higher reward stuff that doesn't make the blog.
The thing is, I just looked for a retraction or an apology or even an acknowledgement of these major mistakes and found zip.
And that's where the suspicion that self promoters engender comes into play.
In a business where you are marked to market on an hourly basis you don't have the luxury of being anything less than straight-up about your mistakes.
In other fields you can fudge, hedge, pretend, whatev. And self-promoters tend to do it more than folks with nothing to prove, or those with nothing to sell.
