A Short Take on Oil

No time for an in-depth article today, but the quick comment is that I think oil is getting overstretched for the short term and is due for a pullback. In preparation for that, The Kelly Letter is shorting the commodity into this week's strength.

Notice that the long ETFs are blinking overbought signals on the charts, while the short ETFs are blinking oversold. It's time to at least get out of long positions, but I think the overstretch is enough to warrant taking short positions -- as we've done.

Comments

[Mad Hedge F...:]

I'll give you an in depth comment. I chatted with Jeff Rubin last night, former chief economist with CIBC World Markets, who reaffirmed my own hyper-bull case for crude in bucketfuls. He was in San Francisco, admiring our civic planning and mass transit system, as part of a tour to promote his new book “Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization.” We are in the bottom of the ninth inning of the hydrocarbon age. The next super spike will take us to over $100/barrel within 12 months of the beginning of an economic recovery, and much higher after that. The problem is that we are losing 4 million barrels/day through depletion just when demand is increasing. The only offset will be dirty, foul, huge carbon footprint, $100/barrel Canadian tar sands, which will double, to account for 40% of our imports. The biggest increase in consumption is in OPEC itself, where consumption has ballooned to 13 million barrel/day and oil is being wasted on a prodigious scale, compared to only 7 million b/d in China. Gas there costs only 25 cents/gal, utilities in Saudi Arabia pay only three cents/gallon for bunker fuel, and Dubai is blowing 3,000 b/d equivalent running an indoor ski resort. Oil over $100/barrel will bring globalization to a screeching halt. Economies will go local because it will cost too much to transport goods, as we have in the past. No more California avocados in Toronto. More importantly, no more Chinese steel in the US, or any other heavy exports, which will lead to a resurgence in domestic manufacturing and the jobs that come with it. Last year $90 of the $600 cost of Chinese steel went to shipping costs. $10/gal gasoline will take 50 million of our 240 million cars off the road. Even if we replace them with electric cars, we don’t have the power grid to juice them. Chinese exports will collapse, but so will their Treasury purchases, meaning no more bailouts for us. Oops. Subprime neighborhoods will get plowed back into farmland so we can eat. I think Jeff is dead on about oil prices. But as necessity is the mother of invention, some of his predictions about their impact on international trade are a bit extreme for me.

Jun 11 10:40 AM

[ArtfulDodger:]

Mad Hedge Fund Trader:

You wrote: "Subprime neighborhoods will get plowed back into farmland so we can eat."

I have some farmland in Carolina and on the way to it there are two subprime sections no more than 7 years old, but they look thirty years old and have numerous homes sitting empty. They are terribly built structures.

A salesman at one of them told me that 20-30 houses had never made the first payment, yet had been occupied for two years. He said lawyers showed up right after they moved in and showed them how to keep the houses without paying.

I'm not sure whether you're saying it or Rubin said it, but I hope you're right. They should be "plowed back into farmland."

There's nothing wrong with renting until you can afford to buy.

I did it forty years ago.

Jun 11 11:58 AM

[ValueInvestor:]

Mad Hedge Fund Trader,

Jeff Rubin has turned into a Global Warming and Peak Oil advocate ever since leaving CIBC. I honestly believe he's turned into an activist like David Suzuki and forgone any objective analysis.

Jun 11 02:38 PM

[Peacelover:]

This is the same Jeff Rubin who predicted last year that oil will reach $200 this year. The fact is that oil went down to $40.

Jun 11 02:53 PM

[Fred Linn:]

The year is a long way from over yet.

Jun 11 04:58 PM

[sethmcs:]

I agree that oil is due to pull back. $200 dollars a barrel? Only if we acheive hyperinflation. Unlikely. More likely is oil will fall significantly after the 4th of July.

Jun 12 01:20 AM

[Jason Kelly:]

Thank you, everybody.

Mad Hedge Fund Trader: I'm reading Rubin's book now, and agree with his long-term premise. To me the basic story for long-term higher oil prices is as simple as it gets: supply is dwindling as demand is exploding.

However, we could have said -- and did say -- the same thing a year ago when the projections were for $200 oil. It dropped into the $30s. The road to the long term is long and winding, and my point in this little article is that oil is due for a short-term pullback even if the long-term will produce higher prices and Rubin's "whole lot smaller" world.

Jun 12 02:21 AM

[Bruce Vande...:]

Well, do you want to be a holder or trader?

If you are a holder buy a basket of good oil companies, stash them away and mostly forget about them for 10 years. You will probably come out way ahead.

If you are a trader you can, with good timing, have more fun (and grief?) and possibly make more money. I personally, have not had a lot of luck trying to time the market.

Jun 12 08:48 AM