Oil Rises Again: What Does it Mean?

A very interesting thing has been happening. Slowly, slowly, oil has started to rebound. Are we in store for more Peak Oil scares ( reality)? Unfortunately, neither I nor anyone else knows where oil is going. What I do know is that oil was one of the strongest commodity movers last week on a relative basis.

From the lows of Feb 19th, oil has made a tremendous move. The question is will it continue? For the week, oil is up approx 10.7%. Seems that many are seeking reasons… maybe it was the result of the FED action and the fears of a weakened dollar or inflation. Reasons are redundant for traders. The fact is oil moved.

The next question is how to put on a low risk trade? As a trend follower, one becomes interested but only if they can put on a low risk trade. There are many gurus who have wagered big on oil this year. Richard Rainwater who sold on the way up has gotten back in the market at the $90.00 range ( possibly prematurely). He purchased Exxon (XOM) stock at approx $75, bought ConocoPhillips (COP) at approx $68, Pioneer Natural Resources (PXD) under $50, BP (BP) as well as Statoil (STO).

Rainwater made billions in his earlier foray into oil. Was he lucky…or were his instincts honed. It is hard to second guess anyone but he surly experienced harsh open trade draw-downs.

On the same tangent, there's T. Boone Pickens and BP Capital. His fund BP Capital has sustained a staggering loss of $2 billion from the drop in oil and natural gas prices. Personally Pickens has lost about $400 million. An interesting question with these losses-- who do you think was on the opposite side of the trade? It is funny no one seems to mention that…

On CNBC, Pickens was repeatedly asked about oil ( after all he is an oil expert) and yet he lost a ton of his money as well as his investors money.

I think what can be simply gleaned from this example is that the fact that crude moves means… it moves. No one one knows if the move will continue or not.

Oh and by the way, I would be willing to bet that those who were on the opposite side of the trade of T Boone Pickens were Trend Followers. They just try to find to find trends and put on low risk trades. They do not know anything more than that. Seems they made alot of money just knowing that.

Comments

[redbaron:]

1) The world runs on oil, and 2) oil is also a inflation play due to it's inverse movement to the US dollar, and 3) the world has a finite, limited supply of oil. Those 3 facts explain to my satisfaction the movement in oil. I for one was not surprised that it has gone back up, and it may well go higher. The only thing one can depend on for sure is that it will continue to change. Following the trend, as always, seems to make the most sense. The market is never wrong, it just takes some of us longer than others to realize it is right.

Mar 23 05:59 AM

[Mad Hedge F...:]

Can't live with it, can't live without it. OPEC voted to keep quotas at their current reduced levels, spurring crude to top $51 last week, a two month high. At this point, helping revive near comatose importers with low prices is more important for members than squeezing out a few more dollars in revenues. The cartel has done a better job keeping cheaters in line than in the past, with Saudi Arabia doing the heavy lifting on production cuts. We are backing off a couple of bucks today because of a surprise 3.2 million barrel jump in gasoline inventories. But the enormous contango has started to shrink, suggesting that the $32 low we saw in December is looking safer by the day. Could crude’s revival be another early hint at a recovery in the broader global economy?

Mar 23 07:33 AM

[cjwirth:]

Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts exacerbate the gap between supply and demand and drive prices even higher.

Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, water supply, waste water treatment, and automated building systems.

Documented here:
www.peakoilassociates....
survivingpeakoil.blogs.../

Mar 23 08:49 AM

[Michael Fit...:]

current low oil prices are not the result of some new large supply source but rather from the severe worldwide economic contraction in oil demand, in part caused by $145/barrel oil in 2008. despite that high oil price last year, worldwide oil production never got higher than 65,000,000 barrels/day and production at the three largest US oil companies (XOM, CVX, and COP) was down year over year. the era of peak oil is here: worldwide oil supply will simply not keep up with worldwide oil demand (assuming a functioning world economy, present day withstanding). the only US fuel source that can be scaled up to solve the US's 65% addiction to foreign oil is natural gas:
seekingalpha.com/artic...

US natural gas resources are abundant, it's clean, and it's cheap.

we also need a strategic, long-term, comprehensive energy policy:
thefitzman.blogspot.co...

if the US doesn't get serious about our oil crisis, we will continue to be on an economic yo-yo while our energy capital flows out of the country at an alarming rate.

Mar 23 09:34 AM

[c300man:]

Here is a comprehensive outlook for worldwide energy demand and supply through 2030.

www.exxonmobil.com/Cor...

Mar 23 09:49 AM

[Andy Abraham:]

How about the revival of inflation? The ABCs of printing money has been inflation... I find it very hard for that not to happen...


On Mar 23 07:33 AM The Mad Hedge Fund Trader wrote:

> Can't live with it, can't live without it. OPEC voted to keep quotas
> at their current reduced levels, spurring crude to top $51 last week,
> a two month high. At this point, helping revive near comatose importers
> with low prices is more important for members than squeezing out
> a few more dollars in revenues. The cartel has done a better job
> keeping cheaters in line than in the past, with Saudi Arabia doing
> the heavy lifting on production cuts. We are backing off a couple
> of bucks today because of a surprise 3.2 million barrel jump in gasoline
> inventories. But the enormous contango has started to shrink, suggesting
> that the $32 low we saw in December is looking safer by the day.
> Could crude’s revival be another early hint at a recovery in the
> broader global economy?

Mar 23 09:55 AM

[BrotherMaynard:]

higher prices are not the result of anything fundamental. we still have massive oversupply, evidenced by the 80m bbl floating offshore; Cushing filled to the brim; ballooning OPEC spare capacity and awful demand numbers.

the bounce is dumb money flowing into etf products in the hopes of getting in on the "dollar weakness" trade. This trade is, in and of itself, ludicrous, as oil's appreciation is due to nothing more than paper chasing paper.

In fact, I would argue that these higher oil prices are going to impel the speculative oil that is in storage to be dumped on to the spot market, putting abnormal pressure on spot prices. The evidence of this could be found in the weekly EIA reports, which would likely show a downtick in cushing supply, but abnormally large overall builds in commercial stocks.

Until there is a genuine uptick in demand, oil is going to have a tough time sustaining itself above $50 for any multi-week period of time.

Mar 23 11:45 AM

[Ferdinand E...:]

I remember when the oil price was in the doldrums, and Richard Rainwater, Carl Ichan and Marvin Davis insisted that it had to rise. I made my students read an article in Fortune in which these 3 gentlemen explained why the oil price was certain to increase, and at least some of my students responded to their reasoning. Laziness and stupidity kept me out of the market, and so I missed making the long green that I so richly deserve. I hope that I won't make that mistake again, but it could happen.

And incidentally, OPEC is not only in position to put a floor under the oil price, they know that they are in position. Forget about an oil price collapse.

Mar 23 01:32 PM

[Andy Abraham:]

Good Point Ferdinand... that is why I always stress having a plan.. it is very easy to miss the big winners... as well as I would like to reiterate..these guys made bets..and it worked.. T Boone Pickens made a bet and it cost dearly.. when one has a plan.. with thought entries and exits... with losses as well as profits... it opens a whole new world of possibilites... Trend followers made money going either direction... the idea of Trend followers are boring...they are not rock stars...but they have the potential to compound money over time...

Mar 23 01:58 PM

[The Greates...:]

Has anyone taken into account for the large overall collapse in the worlds economy. Few jobs, less people driving everyday, means less oil usage. It will take years to undo the damage by the last summers run up in paper oil inflated pricing. If people have no jobs, they have no need to drive, it is that simple.

Mar 23 02:02 PM

[The Greates...:]

Also, there is over 100 million or more barrels just sitting off shore waiting for the price to go up, at a cost of around $75,000 a day. Some people are taking a large risk at those numbers to hold the oil out of the market.

Mar 23 02:04 PM

[Repsonsible...:]

Anybody who voted for "change" can Forget it , Sec of State will protect Big Bank Crook buddies at ALL costs . So its Business as usaul and who's WS s biggest protector NOW ,, why its OBAMA , who PROMISED to Get The Bad Actors on WS ,, course that was before he got elected. There was something about getting ALL the Troops out of Iraq too wasnt there ? NOW we will be leaving 50,000 permantly , just a small security force You understand , ya right !
And All You Greenies Just wait by end of the year All that Green Energy talk , well that just wont be practical to do sorry . We'll throw a few more billion tax dollars at it but bottom line 10 years from now 95% of cars will still be burning Gasoline. You wanted Change will about the only change You folks will be getting is the change You get back from your value meal at Mc Donalds . Bottom Line You all Got hood winked into voting for a Republican from Harvard posing as a left wing Democrate and after 60 days its starting to show ! NO Wonder
Mc Cain had that Big Grin on his face a week after the election !!

Mar 23 02:10 PM

[ArtfulDodger:]

AA:

You are so right. All a trader needs to know is which way the market is going at the present.

Whether traders can, however, make money consistently depends on their ability to manage money. This important point is often overlooked.

Agree?

Mar 23 11:55 PM

[Andy Abraham:]

More than agree.. Trend follow.. have no opinion.. strong money management & risk management.. Personally we do not risk more than 1% per trade of equity...under trade....have a plan..Mostly have the discipline to follow the plan..patience to see the plan through the eventual draw downs...and even lengths of draw downs...

These are the basic ideas.. All the best

Mar 24 05:20 AM