Oil's Slide: A Result of Capitulation Selling?

I am taking a look at oil here. The front month contract has fallen from $147 in July – remember then? – to $33 Friday. This is a 77% decline – in six months!

For what it is worth, the Nasdaq fell top to bottom 77% from 2000 to 2002.

The contango in the futures market is steep. The December 09 contract was trading at $55 while the December 2010 contract was $62.

I am not an oil trader, so my comments are pretty much based on 99% ignorance (and thus is no different than all your other commentary). However, I think this move has priced in far more than any “deflationary” end-of-the-world trade.

Whatever happened to Hubbard’s Peak? Whatever happened to the world running out of oil? Whatever happened to people “rationally” paying $500,000 for bungalows in Calgary?

At least part of this violent sell-off has been driven by the leveraged Mindless Momentum (MiMo) quant hedge funds who buy assets that are going up only because they are going up and who sell assets that are going down only because they are going down. Just like they helped push oil up to $147 a mere 180 days ago, they are driving it too low.

Yes, I know, the inventory build was greater than expected, Cushing is full, the economy is going into the Great Depression II, deflation of -25% is a certainty, nobody is going to drive a car again, blah, blah, blah.

I am not blithely dismissing the sell-off. I had been bullish on commodities for much of this decade until markets got really stupid earlier this year. (I always warn people, "There is a reason why they are called 'commodities!")

Thus, is this 1981 for oil when prices collapsed never to come back, or is this the 1970s, when oil soared at the beginning of the decade, consolidated for a few years, then went to new highs at the end of the decade?

I do not know, and I highly doubt that the denouement now will be similar to 30-40 years ago. However, unless I have missed something, I have not seen an enormous amount of new supply come on line, nor have I read about 300 million Chinese moving back to the countryside.

I do not know how low oil is going to go. The trend is still decidedly lower, and asset prices always seem to go a lot further for a lot longer than I ever think possible.

However, the downdraft in WTI over the past few days feels like capitulation selling. I think oil is cheap and will be looking for an entry point in the not too distant future.

Comments

[herbert hoover:]

"I think the Government is selling oil."

Maybe they need the money? The Fed and Treasury have been investing in a lot of crap lately.

2008 Dec 22 11:30 AM

[Henrique Si...:]

They are trying to stimulate the economy. That`s the reason.


On Dec 22 11:30 AM Herbert Hoover wrote:

> "I think the Government is selling oil."
>
> Maybe they need the money? The Fed and Treasury have been investing
> in a lot of crap lately.

2008 Dec 22 11:54 AM

[Prudent Man...:]

Capitulation? That's funny!

We are going into a prolong recession and FDR can't pull this out of it with a war, that phony.

That money and assets you had? Poof! Gone, never more to return.

So, who needs oil? Not enough people to put the price up. Sorry the Saudis, Iranians, Russian, Venezuelans, et al are in the toilet so what do politicians due when in political trouble like JFK in Vietnam, start a war.

Look for the Obama/Hillary Administration to pour troops into Afghanistan and they may have to re-institute the military draft as who in their right mind would fight for a crooked, Left-Wing, Ivy League statist, belt-way elite Administration?

2008 Dec 22 12:09 PM

[blu:]

Increasing oil price volatility is a post "peak oil" symptom.
Higher highs and higher lows are forthcoming. The highs will be more painful than previous ones. This is not going to be a "fun experience".
Price stability is no longer a possibility if we can't grasp the concept of peak oil and the need for alternatives.
The volatility of price feeds upon itself. The lows cause less development of hydrocarbon sources, which cuts supply, leading to higher highs.
The transition from hydrocarbon sources to alternative sources should have commenced years earlier. The cost of transition at this late date, will be extracted by the extreme price volatility. The low side of this volatility defers alternative development, as some see the low side as more permanent than it is. Eventually, the market will "see the light" and a commitment to alternatives will become more focused and entrenched. Let's hope it happens sooner than later.

2008 Dec 22 12:16 PM

[Hedged In:]

Good article, clearly illustrating that the recent oil price is determined not only by actual supply and demand, but is either heavily sentiment driven, impacted by commodities speculation, or both.

The 2 year chart for oil makes interesting viewing: finance.yahoo.com/q/bc...= . Perhaps oil is overshooting on the downside, just as it overshot on the upside.

One additional factor to take into account: Obama's team has stated that a chunk of the fiscal stimulus will be used to cut energy consumption, specifically consumption of heating oil (see seekingalpha.com/user/...). That will exacerbate the impact of the recession on the price of oil.

2008 Dec 22 12:55 PM

[PeakOiler:]

Toro, you really need to spell-check your stuff, you know, if you want some credibility. It's M. King Hubbert, not Hubbard as you write. Peak Oil, based on Hubbert's modeling in the mid 1900's, said nothing about the world running out of oil, rather it targeted production peaks (big difference). There are enormous pools of oil in the world but, as the easy oil has been increasingly tapped, what remains is becoming more difficult and more expensive to acquire. Peak oil refers to the point in time when production peaks and begins to decline, and we are within a narrow window of that occuring now. So at some point in the not too distant future, it becomes more cost-effective to utilize other less expensive and more readily available sources of energy.

2008 Dec 22 09:55 PM

[ArtfulDodger:]

Indeed, where are all the oil bulls? They were all over these pages when oil was $140? Raging that it was going to $200! Now, you can't find one.

2008 Dec 23 09:04 AM

[unfaire:]

I have not studied the oil market at all. Here is just my speculation on the current oil situation.
A little while back, with the easy money policy, we were awash with cash and drove oil-guzzling SUVs and were buying all kind of junks made from petroleum (oil) by cheap Chinese labor. Oil production is limited and it is like the highway when just a few more cars than it can handle it creates a huge traffic jam. High oil price ensued because of the huge demands we put on oil a little while back. Now, the traffic has slackened and the highway remains as before. Of course the oil price collapsed. But it is the traders who blindly bought up the futures got the short end. The oil producers had sold them at the high price but now the traders who cannot take the delivery had to unload them at any low price. The producers are not cutting back the production because they still have the obligation to those traders who bought the future at 100+ a few months ago. They are making a killing and it is the buyers’ tankers afloat with glutted oil.
Now, the government has huge hole in the ground. They can take current delivery at 30 or so while selling futures at 60 or so with 100% profit. I am not suggesting the government is doing it. But, if you own that big hole, wouldn’t you do it?
Don’t believe OPEC will cut back the production immediately. They are pumping oil today for 100+ contracts they sold a while ago and they are selling futures at 60. It is only when the futures get down to below 30, or even below 20, OPEC may really start to cut back.

2008 Dec 23 09:23 AM

[Market Folly:]

overshoots to the upside and overshoots to the downside. people just jumping on the train and riding the wave, playing the directional momentum both ways.

fundamentally, oil looks great for long term. recently wrote about cheap oil, growth, and compatibility: www.marketfolly.com/20...

2008 Dec 23 09:27 AM

[john s. gordon:]

you have put your finger on the cause - speculation - aided & abetted by goldman sachs.
> jack

2008 Dec 23 09:57 AM

[bowman711:]

With governments around the world throwing trillions of dollars into the economies to try to 'save' the economy, is there ANYONE who thinks they wouldn't be doing all the can to lower the price of oil, probably the single most critical commodity needed by every industry? [Even a church youth pastor is dependent on oil so his parishoner's parents can bring them to church.]

2008 Dec 23 12:21 PM

[Kunst:]

They should be buying oil. What a great time to fill the Strategic Petroleum Reserve. 4 barrels for the price of 1 (in July).


On Dec 22 11:02 AM Simmons wrote:

> I think the Government is selling oil. Read the following article:

>
>
> oiltradersblog.blogspo...

2008 Dec 25 01:27 AM

[Kunst:]

"Whatever happened to Hubbard’s Peak? Whatever happened to the world running out of oil?"

It's still coming, just not yet. Today's supply and demand sets today's price. It's like being in the water. If your head is one foot above the water line, your air supply is no problem. One foot below the water line and the situation is fundamentally different.

2008 Dec 25 01:30 AM

[bill d:]

* PeakOiler - Love all the nit-picking - your text: never have seen spell check with a hyphen and "occuring" is always spelled with 2 r's. So much for YOUR credibility ???

Jan 01 12:27 AM