December 02, 2012 at 10:00 AM EST
Will WTI Withstand the Fiscal Cliff?
Is the U.S. headed for economic collapse, or can we weather the storm?

This Article Originally was Published here: http://www.energyandcapital.com/articles/will-wti-withstand-the-fiscal-cliff/2850

The oil market wants a solution to the impending fiscal cliff.

Don't we all.

The topic blew up once the election dust settled...

The U.S. is facing massive tax hikes and spending cuts on January 1 if the presidential administration and Congress cannot come up with a solution.

The days are numbered; no one will be excluded.

The fiscal cliff was set in place to try to force a solution to the nation's crippling debt problem.

But the Senate, the House, and the Obama administration have been at such a standstill that the threat remains very real.

And we've seen this reflected in oil prices: Oil began the year trading at spot prices near $100 per barrel. This fluctuated throughout the summer, but by early fall the price was back up again.

Prices have been slipping back down since October, holding under $90 a barrel as uncertainty about the fiscal cliff weighs on the economy.

Crude Oil 2012

On Thursday futures for January delivery were up for the first time in days after the Commerce Department announced GDP growth was 2.7% in the third quarter, beating estimates of 2% and doubling the second quarter results of 1.3%.

Crude prices rose closer to $90 on the news — an indication that positive moves in the domestic economy will be positive for oil as well.

Later that day, House Speaker John Boehner gave a less-than-optimistic press conference about the state of the fiscal cliff talks in Washington, sending oil back down. Boehner stated he was “disappointed in” how far the talks have gotten and that there has been “no substantive progress.”

Not great news for an economy that's still just getting back on its feet.

We are following this news with bated breath. Oil could drop even further if we do go over the fiscal cliff. The Congressional Budget Office has even suggested we run the risk of falling back into recession if it happens...

I realize Congress is the body trying to fix this budget crisis — but can we really trust this same group to tell the truth about what's going on?

The government doesn't exactly have a track record for giving it to you straight.

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Billionaire investor Warren Buffett has had a long run in successful trading. He's been dubbed the Oracle of Omaha for a reason.

And the Oracle doesn't think recession is an option...

Buffett expressed confidence in the country's ability to hold out in an interview with CNN earlier this month:

We had Hurricane Sandy which disrupted the economy for a period, we had Katrina many years ago, there are things that will disrupt the economy. I mean 9/11 was an extraordinary case but we have a very resilient economy — we've had one for hundreds of years.

And the fact that they can't get along for the month of January is not going to torpedo the economy.

Still, the sort of uncertainty the economy is experiencing leading up to the cliff is going to leave U.S. crude unsteady for the time being.

A reallocation of the WTI and Brent positions on the Standard & Poor's GSCI Commodity Index this week suggested Brent could surpass WTI to become the world's most-traded commodity.

The average daily trading contracts for Brent have jumped this year while those for WTI fell.

WTI's landlocked location in Cushing, Oklahoma, and their lack of sufficient infrastructure is part of the reason trading has decreased. And prices have been dropping due largely to increased U.S. production.

But next year pipeline expansion will create movement and begin to close that spread (unless, of course, the fiscal cliff thwarts the price increase).

So, are we going to believe the government, which clearly has its own agenda — or a man who has made billions on analyzing the facts?

As Buffet pointed out, history's on our side...

There's one thing you can be sure of: North Dakota maintains the lowest unemployment rate in the nation, with some towns boasting the lowest rates in history.

Bakken production won't slow down just because of a bump in the U.S. economy, if we even hit that bump at all.

Keep in mind it's the shale deposit where Buffett placed his bets...

You don't need billions to follow in his footsteps.

Good investing,

 

brianna sig cropped

Brianna Panzica
for Energy and Capital

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This Article Originally was Published here: http://www.energyandcapital.com/articles/will-wti-withstand-the-fiscal-cliff/2850



Will WTI Withstand the Fiscal Cliff? originally appeared in Energy and Capital. Energy and Capital, a free daily newsletter, offers practical investment analysis in the new energy economy.
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