Crude Oil Price Is Falling: How Do You Like Them Apples?

I don't really get a ton of comments on my site. That doesn't bother me one bit. What I do get is a virtual cornucopia of emails. Those tend to entail a great deal of analysis going backwards and forwards. I love that type of collaboration, as it usually spurs some kind of thinking in both directions. Keep it coming.

I do get comments on other sites that "borrow" my feed.I have absolutely no idea how many sites borrow my feed at this point. It would be impossible for me to keep track of all the comments and try and address them individually at all the various sites.

I stopped by the one site that I am quite thrilled to be a part of and that does more than just repost my feed; they correct my grammar and take out my little comments to people that I know. That site is Seeking Alpha. Much to my dismay, I've been getting bashed a little on some analysis that I did. To begin with, I won't lose a moments sleep over it. I've got other things in my life that are far more pressing, like do I put the tire pressure on the rear tire of my mountain bike at 45 or 50 for today's ride? That's about where I place this particular individual's comments in my life's rankings.

Keep in mind, my site is a free site. My approach to the site is that I am rambling for my own sake, and if along the way you can pick up something from my own insight or experience, then more power to you. If, on the other hand, you'd like to try and openly attack my analysis, fine. The market is a fair and impartial playground. It takes no prisoners, and may the best win. In fact, I almost welcome it as I then am forced to go back and look at the finer elements of a trade to make sure I'm not missing something completely.

That being said, let's take a look at some comments I've been getting on Seeking Alpha. Specifically, let's peel our corneas all the way down to the last particular commenter. Here's what he had to say about a call of $40.00 oil I had back in mid-December:

Well Andrew...It's Dec 20th and still no defence of your column...a poorly analyzed piece of fluff so your picture..I think..might hit some investment blog..somewhere...Please Alpha Readers...don't follow this nonsense...you WILL lose money hand over Andrew....

To begin with, my name is David. And, you're right.... I do this for fluff. And that makes you the fluffer. Are you wearing knee pads... because we are now going to take a look at the price chart on oil:

I've been calling $40.00 oil for some time, and that looks like it is very likely to happen. I'm still leery that an economy that is stronger than most are seeing (did you see the 299k initial claims yesterday morning?) the effects of propping up aggregate demand for commodities, as well as resource utilization driving up in the form of higher wages. We are seeing higher wages right now. In fact, wage increase is higher than inflation itself as of the latest data. That is exactly what the Fed has been concerned about, as well. We're more likely to see higher interest rates going forward because of that single factor. And, that would mean even lower oil prices.

One thing that the markets have taught me is that humility is something that can be served almost daily. I try to look at both sides of the market when I place a trade. I have another journal that I ramble incessantly about trades right here on my laptop. I'm constantly arguing with myself about trade ideas, and looking at every single angle. That's been very helpful. The approach is exactly the same that I use on my site. It's just that my site makes a helluva lot more sense than my journal, and is public. The collaboration has been a great side benefit that I don't think I anticipated when I first started blogging. It's been a tremendous experience, and thanks for that to all those that I communicate with.

As for this particular individual, how is the toe jam tasting?

Comments

[Greg Calder...:]

I follow Cramer pretty closely cramersez.com or thestreet.com. He pretty much agrees that a free fall is coming as the "terrorism" premium is ended, and there is simply no place to put the oil. Also, a good stock play is to wait for HAL to announce this quarter and take the hit. Then when it falls to about 23-24. buy. End of April will see HAL with 3.3 Billion in cash from the KBR spinoff. The second half of the year will be HAL's.

2007 Jan 12 06:12 AM

[David Taylor:]

Greg...

Thanks for the comment. I focus primarily on the currency market, but the eqtuities markets and bond markets are very important as well. I think with oil diving like it is, there are reasons to see a continued spring in equities steps. As for oil, I've been seeing the 40's as being more and more realistic. Interesting that the "risk premia" seems to be eroding, and just this morning there was a bomb blast at a U.S. Embassy. Not likely to make any waves in the oil markets. But, a timely reminder.

2007 Jan 12 11:38 AM

[Greg Pinelli:]

David Andrew...Have read your previous posts and all have lacked anything resembling analysis. The odds are very high that oil has will not drop to $40.00. There are numerous reasons including demand, depletion and geopolitical...to say nothing of supply curtailment by OPEC. In any case, humility is certainly a lesson well learned..yet I see practically none of it from your side. You have the foresight to know what geoplitical events will be occurring months from a prediction date? You have notable company in the exceptionally loudmouthed Cramer who seems to also have preternatural insight into the world's conflict barometer. I'm reluctant to even label what you present as analysis..it's simple, unsupported assertion.
For those Alpha readers who care to make money look to USO...ERF...IEZ among others. Also..catch a clue..the United States is no longer the sole driver of the world's economic outlook or its energy thirst...Finally, if you didn't post with the pretentious David Andrew ( I have more names than you heading) people wouldn't be confused.
As a parting reminder...nothing in the way of terror or Middle East conflict of a conventional nature represents a "premium" any longer...It is, and will remain, a fact of bringing oil/gas to the market..like building a pipeline or paying higher shipping day rates.

2007 Jan 12 09:03 PM

[Ray Lopez:]

Anybody have a position in oil or are all these posts just mouth bets? (like mine). Personally, I think oil will drop--but I've been saying that since 2004, when I sold (at a small profit) my oil stocks.

2007 Jan 15 08:17 AM

[Quaker:]

I have mostly canadian income trusts which I got at very reasonable prices. That being said, That being said, prices really don't reflect supply and demand. There are three reasons.

First, nobodies really sure what supply is and how long it'll last. If you don't know what supply is, how vcan we say it's controlling price.

Second, the "markets" control and increasingly small amount of oil. Brent has gone from 30 tankers a month to about ten. WTI's in the same boat. This is why Opec switched to a futures benchmark.

Third, The world is awash in useless cash which makes the markets more like casino's than places where you'd do business. Most of the people buying futures couldn't find oil in a gas station.

I worked in the oil industry for a long time and can assure you, you could fit more oil industry information on a post it than you'll find on these message boards.

IMO, oil will be about $120-$150 within three years. The best buys right now are Ensco, Rowan and nabors. It has nothing to do with supply and demand. Energy is never a supply problem. It's always the same thing. Misallocation of resorces. It's an engineering problem. How many oil industry engineers do you know? In 1980, evverybody I knew was one.

45% of the S&P is banks and phone companies. I'd short banks and phone companies and buy oil.

2007 Jan 16 01:11 PM

[Quaker:]

People who try to predict the short term price of oil are like the broken clock that's right twice a day.

The excess inventory to me is a bit comical. US inventories were pretty low when oil was $20. The US has 1 billion barrels in inventory, 360mm in private hands and 660mm in the strategic reserve. If there was a shock, the US could probably go about a year before our economy suffered anything more than a price shock.

As to "prices" futures prices are influenced by a number of things. First, the hubs are getting smaller as worldwide liquidity in dollars soars. WTI and Brent process a half of what they processed ten years ago. Oman is too small to be used anymore. Obviosly the spot futures pricing mechanism is going to be revisited.

As to the terror threat, it's hard to imagine that anyone that doesn't live in a cage and speak only aramaic can belive the terror threat is REDUCED! Iran has threated to shut the strait of Hormuz if attacked. Ireal has made dozens of dry run simulations of the Isreal to Iran bombing run. Obviously, since the US used 58 F-16's and 12 stealth bombers and two days to eliminate (finally) Saddams nuclear program in 1990, Isreal has no choice but to go nuclear. One would imagine that since the Iranians were the first ones to bomb it in 1980, they've learned a little. Equally obviously it's pretty clear that even with two aircraft carrier battle groups the US can't defend both the strait of Hormuz, Kharg Island and Ras Tanura.

In this enviroment, predicting short term pricing is like trying to buy a birthday present for a schitzophrenic. Longer term it's a lot easier. High prices don't lead to more production only. They also lead to greed, envy, fear, panic and paranoia.

2007 Jan 15 10:26 AM

[David Taylor:]

Paul...

Thanks for the very constructive comment. You are right. There are a lot of variables at work right now in the energy markets. I'm hopeful that most of the terror threats will work themselves out now that we have a more balanced government here in the U.S. Hopefully that also means some kind of long-term accord with Isreal and Iran. Hopefully, being the optimal word. WIth what fundamentals we have available to us right now, I'm fairly confident that the price of oil will continue to fall, as it is doing again today even in light of one of the worst storms to hit the entire U.S. in years.

2007 Jan 16 11:33 AM

[David Taylor:]

Ray...

I don't actually trade oil directly. Instead, I trade currencies. That being said, the Canadian dollar is heavily entrenched, amongst other currencies, with the price of oil. So, directly, no. Inderectly, yes.

2007 Jan 16 11:36 AM