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Thursday, December 1, 2022


Demand Destruction

High fuel prices cause demand destruction, but not because people suddenly change their driving habits and become conservationists. Rather, plants close and people lose their jobs. High natural gas prices are already taking a toll. ” – PastPeak.com

We are facing a possible “Demand Destruction” on two fronts, one being oil and one being housing.

In oil, the above quote holds true, at a certain price people do use less. The real question is how much less can you use? Almost any commodity can suffer from demand destruction, even food can be cut down when necessary but does energy really fall into that category or is it like Air and Drinking Water, two things that presumably you would need in the same quantity no matter what the cost.

I think oil is more like food, yes you need it but not that much. Just try to drive your Hummer in London and you will find it barely fits on many streets and there is just nowhere you can possibly park it! Europeans, who have been paying $4 a gallon for gas since the 70s, have learned to cut back about 1/2 their total consumption.

Since we consume 1/3 of the world’s energy in the US (I know, it’s sick) we can assume we must have a little room to cut back since the other 5.8 Billion people seem to get by on an average of 1/10th the amount of energy that the average American consumes. Even if you throw out all of Africa and most of India and China since they are farmers, you still have 300M people over here eating 33% of the energy pie while 3Bn people over there are getting by on the rest.

So even being generous, we use 5x more energy per person that the rest of the industrialized world.

Well, I’m embarrassed, how about you? And they just sent us their oil to help out after Katrina/Rita!!! I don’t think the rest of the world can really cut back on their consumption but I am sure we can but even if we cut back 25% over 2 years, that would only drop world consumption by 7%. So I am long on oil because we are running out of it a lot faster than that but, in the short run, I think we are in a panic sell-off.

My targets for Oil Shorts are based solely on investor sentiment and oil heading to $55 on continued warm weather in the East and in no way on real value. The stocks most likely to go down are:

  • XOM – if they break $58.50 they are likely to hit $55
  • THE – still up 150% for the year. Below $41, 50 200 dma sits at $31
  • BJS – they are no HAL, but up close to 100%
  • SLB – great company but up 20% in last 30 days, will give 1/2 back at least.
  • PDS – up 100% for the year
  • OII – if below $49.50, look for move toward 200 dma of $43
  • NE – up 20% in 30 days back to $65 or less

All of these would be very short momentum trades that should be taken off the table if the weather gets colder, the inventories go down or Valero goes up.

On the housing front, we have a similar situation. This country is expanding and we are running out of room, our housing prices are 50% less than Europe’s but everyone thinks there is a bubble. The press and Greenspan have been relentlessly trying to kill housing for 2 years and this may finally be the time it works. Although I think this drop is already overdone, several homebuilders are likely to give up the small rebounds they have had since October:

*NCS – at a p/e of 15 it’s a pricey homebuilder

*KBH – still close to 50% gain for the year
*BZH – “high” p/e of 12, up 50% since 10/1
*PHM – up 35% since 10/17
*WLT – p/e of 22, far above 50 and 200 dma

All these trades are looking for 10%, with a real desire to get out at 20%. Stop loss at 10% because if they go up at all, something is wrong.

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