Oil Bull Turns Bearish

I have never seen so many people jump on the "$100+" oil bandwagon as I have over the last several months. And yes, as a contrarian, this makes me a tad bit uncomfortable.

Barclays Bank is now officially throwing their hat in the $100+ oil camp. From Reuters:

LONDON (Reuters) - Investment bank Barclays Capital has raised its crude oil price forecast for 2008 to more than $100 a barrel, citing lower-than expected supply growth from countries outside OPEC. The forecast is the most bullish among 30 banks regularly polled by Reuters and follows a spate of downgrades to estimates for supply outside the Organization of the Petroleum Exporting Countries.

"We pushed it over $100 for the first time," said Kevin Norrish, analyst at Barclays. "The non-OPEC supply data as its coming in has been much worse than we thought."

The obvious question is, where were these strategists/analysts a couple of years ago when oil was at $40-$50/barrel?

I know for a fact that most were not predicting $100/oil. Heck, most were actually expecting oil prices to decline. I was interviewed on Marketwatch TV in February of 2006 saying that I believed that oil was heading to $100+. Now, I bring this up to share with you my bullish credentials. But now...I have turned bearish.

First, I want to let you know that I am as big of long-term commodity bull as they come. I understand the fundamentals that are driving this commodity bull market...I have even written a book about it. However, I also understand the speculative froth that often enters the markets - and the trend following approaches that hedge funds and other traders implement. The leverage aspect of the futures markets means a lot of money to come in (and go out) in a quick period of time. The end result, of course, is that while the oil bull market will continue to climb higher for the next 7-10 years, it will also experience extreme volatility as prices will often get ahead of themselves.

In my opinion, we are now in the oil pullback mode. The move to $110/barrel was largely based on speculation and hedge fund interests. Fundamentals did not warrant such a rapid move up. Currently, energy supplies are showing a buildup and a slowdown in the US economy (the largest oil consumer) will have an impact on oil demand. So even though the long-term fundamentals remain intact (finite oil supply and growing demand from China and other industrializing economies), there will be a intermediate term slowdown.

Here is a good article from the The Sunday Times.

I believe that you will also see the “take-the-profit-and-cover-the –margin-call” position from many hedge funds as the stock market continues to unwind.

Going forward, I expect further volatility in the oil market…but a trend that will eventually take us back down to the $75-$80/level.

Longer-term, I still believe that we will eventually see a move up to over $200/barrel.