The Oil Roller Coaster is Over

By Bob O'Brien

Last year when oil went to $147.00 barrel many people blamed the traders, but this was not the full story at all.

Oil and commodities started to be recognized as a new asset class by a lot of investors, and with all the new creative ETF’s in the world it became really easy for people that were looking for some diversification to get in on the action.

Historically, commodities like oil, have had more of an inverse relationship with stocks, but over the last couple of months this has not been the case at all. Both commodities and equities have been doing well at the same time.

In fact, this has been the case for quite a while now. We saw this when with the rally from 2003 to 2007 with energy companies like (XOM) leading the bull market.

Oil in the global economy has become more of an indicator for the global economy’s health, where in the past rising oil prices was a bad thing, because it beat up the best consumer in the world. (U.S.A.) The correlation is evolving in the global economy and both stocks and oil may continue to rise together.

When oil went to $147.00 a barrel and down to $33.00 many of the big money managers got burned hotter than an oil fire. I don’t think you will see that kind of rush to oil like we did between 2007-2008. Oil really traded more like a financial instrument than the actual commodity itself, and got way ahead of itself in that time frame.

Right now, at around $70.00 a barrel is legitimate price for oil, and you will probably see it increase from here, but not make another ridiculous climb to $147.00 in a short period of time.

The three major things to look out for are:

The Dollar. If the dollar falls off cliff, oil prices may go back up to $147 and will continue to rise since it is priced in dollars. This is probably not going to happen. The Dollar will probably decline, but the pace of decline will slow.

Treasury Auctions. As Treasury Auction continues to become weaker and weaker, this should sustain the dollar as rates rise in the free market. This is what will help sustain the slow pace of dollar decline.

OPEC. It is not in OPEC’s best interest to let oil prices get way out of control, to the point where the global economy contracts and then shuts down.

Original article

Comments

[H. T. Love:]

"OPEC. It is not in OPEC’s best interest to let oil prices get way out of control, to the point where the global economy contracts and then shuts down."

But it is in the interest of GS (calliing for $85 this year and $95 next and holding a *ton* of futures) and JPM, with literally a boatload sitting off-shore in an arbitrage play, for prices to continue on up. They move markets and will do so to benefit themselves regardless of damage to the rest of the economy.

My Humble Opinion
HardToLove

Jun 10 08:35 AM

[I am not a ...:]

The Copenhagen Conference at the end of this year will show us what the future price of oil will be,or what it is intended to be. last year on the BBC world service it was suggested that the whole idea of the copenhagen conference was to set commodity prices and to set them so high that consumers would slow down on buying products, Thus saving the planet.
We will see when we will see.

Jun 10 08:44 AM

[Old Trader:]

Mr. O'Brien,

I sort of wonder about your last point in regards to OPEC. You're correct in saying that its not in OPEC's best interests to knock down any nascent recovery, but the current adherence to their quotas is almost unprecedented. Too many members need oil to be at current prices (or higher) to balance their national budgets. Additionally, Saudi Arabia, the "swing producer" mostly produces a lower grade sour crude, so their excess production isn't especially helpful in moderating gas, diesel and jet fuel prices.

Jun 10 09:31 AM

[Ferdinand E...:]

The Copenhagen Conference. Hmm, is that by any chance a creation of Bjorn Lomborg - or a spin-off of his Copenhagen Consensus? You know, the gig where a collection of academic busybodies and ignoramuses go down to Copenhagen's wonderful Tivoli after a busy day of talking about"setting commodity prices", and while they are there drink a few cases of beer.

Jun 10 10:43 AM

[bobrien@myw...:]

Well said Mad HFT. It is going to cool off!

Jun 10 11:08 AM

[Living4Divi...:]

Nice post. To add to your reasons for Higher or Lower Oil Prices
Higher Oil Prices Are Caused By:
A Weaker U.S. Dollar.
Competition From Alternative Transportation Fuels
OPEC's Production Quotas And The Inventory Of Crude Oil
Demand: The Pace Of The Global Recovery.
Speculators And Hoarders

Rather than repeat my arguments here, feel free to read my rationale in the article titled "How High Will the Price of Oil Go?"
Here is The Link: seekingalpha.com/artic...

Jun 10 11:54 AM

[Bruce Pile:]

Oil was a good investment back before anyone had much awareness of a peak oil theory. I went to a severe overweight in oil in 2004, and it was a good, safe area then. But now the chronic supply/demand problem with oil has become too much the center of attention and a big money fund plaything straying too far from the fundamentals at the drop of a hat. Long-term, the oil shortage will likely be worse than most analysts think (see my Instablog post "The Alternative Energy No One Is Thinking About"). But the stampeding fund and ETF herds make it a very dicey short-term investing area.

Jun 10 01:15 PM

[Henry Buttal:]

So what I take from this is:
- volatility in the commodity prices will likely to continue
- however, the exploration and production companies probably won't run up as quickly or as high in the near term.

I can't agree with the concept of the dollar remaining strong enough to have a positive impact on price. Even if it is still a year off in coming, the dollar will soften and add to the price per barrell.

Jun 10 10:06 PM

[untrusting ...:]

Isn't it amazing how GS was forecasting $25/barrel oil just a few short months ago. Yet after GS and JPM picked up over 100 million barrels back at the $35/barrel and are storing them offshore in tankers now, amazingly GS now forecasts $75-95/barrel oil. Demand fundamentals are still declining and OPEC will almost surely be cheating on their production quotas as will Russia, thus significantly increasing the supply of oil. Yet GS and JPM are still able to manipulate the ST price of oil higher. The real experts on oil such as Schork and WTG Economics are extremely bearish on oil prices (as are the oil companies), but apparently the financial engineers can make oil prices rise whenever they want. Too bad the regulators are not willing to put an end to this speculation and manipulation in oil prices.


On Jun 10 08:35 AM HardToLove wrote:

> "OPEC. It is not in OPEC’s best interest to let oil prices get way
> out of control, to the point where the global economy contracts and
> then shuts down."
>
> But it is in the interest of GS (calliing for $85 this year and $95
> next and holding a *ton* of futures) and JPM, with literally a boatload
> sitting off-shore in an arbitrage play, for prices to continue on
> up. They move markets and will do so to benefit themselves regardless
> of damage to the rest of the economy.
>
> My Humble Opinion
> HardToLove

Jun 10 10:58 PM

[cfish:]

I don't believe GS can single handedly control oil price - a task even OPEC can't accomplish. Especially GS is trading futures with counterparties that aren't any dumber. GS certainly can't control the price of the dollar.

I go with the micro view. Talk to your local business owners and see what they say. I can tell you that the sentiment has improved greatly since Feb.

For many reasons, I think the consumer optimism is temporary. I do think inflation is coming, but not right now.

Jun 11 02:54 AM