Why Oil Won't Penetrate $150/Barrel 14 comments
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Oil has enjoyed what I would describe as an “increase of excess” in recent months. For a commodity to appreciate by over 34% in seven weeks is an extraordinary feat. This is especially true when demand has certainly not outstripped supply to warrant such a rapid and exorbitant move. Allow me to welcome you all ladies and gentlemen, to the gravity-free zone [GFZ] of the oil trade.
The gravity-free zone is when a specific asset or asset class is on a bullish momentum run that simply refuses to be stopped. The money is just so damn easy that you don’t question it or the faulty reasoning behind it. Why look a gift horse in the mouth? In essence it’s like that Tiger Woods commercial where he hits a golf ball on the moon and Newton’s 1st Law of Motion comes into play: every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it. Well the bullish force in the oil trade is greed while the bearish force is common sense and paranoia. As of now we all see that the bulls are winning hand over fist, battle after battle. In fact it’s as if the bears aren’t even showing up. Some commentators and authors in recent articles have even suggested that the bears are helping the bulls because they’re covering wrong-way bets, thus furthering the price appreciation.
I know, I know, most of you reading this article are saying “Hey dummy, the first rule of investing is don’t bet against the market”. Typically I would agree with that statement. However there are times at which the bulls become so egregiously optimistic and openly obnoxious that life’s irony jumps in their way and causes a dead stop to any type of forward progression. It is my belief that the oil trade has become simply too easy.
So what happens now? When a trade becomes too easy certain things begin happening. First, the latecomers to the game become desperate to capture the profits their peers have already earned begin jumping in head first. This causes a demand displacement in the price of the asset, forcing it higher. The backs of the wrong-way bettors are finally broken so their reversal of their trades thrusts prices still higher. And once both groups have entered the party you know it’s going to be a doozy. The GFZ is what we have witnessed as of recent: sharp, drastic price appreciations with minimal corrections – a seemingly impossible force to reckon with.
Here’s why I believe oil will not penetrate $150 barrel in 2008.
1: Analysts keep raising their predictions to ridiculous heights. I don’t believe that global demand is the cause behind the current GFZ. A big part of this is because I’m still in the camp of a severe recession and a bear market which we have yet to see. As a global slowdown ensues the price of oil is going to collapse very rapidly to at least, in my opinion, $110 per barrel (a 15-20% decline) in a relatively short and painful (for bulls) period of time.
2: Market psychology. The fact of the matter is that there are people who are early to a trade, perfectly timed with a trade, and late to a trade. The ones who are late as mentioned above are the ones who cause the final thrust into the GFZ prior to gravity returning and the bulls (who were enjoying their newfound weightlessness) dropping like stones. It’s also these ones that get burned on the way down. However, the early movers and perfect traders will have seen significant unrealized profits by the point the GFZ zone hits. These same investors/traders will start asking themselves “Hmmmm, I’ve already earned a fantastic ROI….. I wonder when the sh*t’s going to hit the fan….. better lock in some profits”. That is, unless they’re incredibly good or incredibly greedy. So they start selling which puts pressure on the market as others see the smart money bailing. Eventually this causes a cascading batch of sell orders forcing gravity to return. All the bulls who were flying high have all of a sudden realized that excess can only exist for so long before it’s punished.
3: Look at the graph.
click to enlarge image
Disclosure: Long DUG
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This article has 14 comments:
- It doesn't make sense, to say that demand doesn't outstrip supply. When you look over the last 3 months, it may be true. But important is, how things work out over the year. Every spring inventories build up and fall until the end of the year. In case, you didn't notice: inventories are lower than last year. (Cushing in particular)
- Can oil fall 20 or 25 bucks? Absolutely. Is it likely to cost less than a hundred bucks a barrel over a long period of time, hardly.
- Even the IEA (usually behind the curve) is going to slash their supply forecast significantly. They finally figured out, that fields have a limited life span.
- The sweet grades are dying. Even if demand was flat, they would rise in price.
- Western refining infrastructure is old and needs the sweet grades. Environmental legislation demands less and less sulfur in fuels. Old refineries need high quality crude to meet those demands.
- Surprise! Cars and trucks in emerging markets run on gas and diesel, too! Guess what, they can even afford it, since they have huge surpluses and private savings rates.
- Is the oil market a victim of 'irrational exuberance'? I could make the point, that the last 50 years in the oil market were a poster child for 'irrational exuberance'. Is it normal, that the commodity, that makes our civilization possible, is cheap? It is not. It was only made possible by luck. The luck being, that vast and easily produceable fields were discovered decades ago. Imagine, if those fields have not been discovered, oil would have always been expensive.
- Now finally the markets gets, that those fields are in serious decline and bringing new capacity online takes time and is exceedingly expensive. Furthermore, our government (and I include Congress in this) is completely incompetent (over decades by the way). They practically accuse oil executives of stealing from the people, when it is themselves, who hinder the oil industry (which is paying a large large large amount of taxes) in every way possible to maintain production levels. Why can Brazil find and develop huge finds off their coast and we can not? How humiliating is that? Imagine, what a find like this would do to our country? Just to remind people - 85% of our coast line is off limits for drilling and have not been explored.
Here is an interesting article:
online.wsj.com/article...
- Yes, I read the EIA study, that drilling in ANWR would only take 75 cents off the barrel, BUT PAYING 300$ PER BARREL AND NOT GETTING ANY BARREL AT ALL ARE TWO DIFFERENT THINGS!
- Conservation: Is it normal that average joes drive a V8, when average joes in other countries make it with a 1.6l 4 cylinder engine? It is not. It is not cool anymore, it is just waste.
- They build a hundred major airports in China and I don't think they are going to use gliders. Face it people: The times, when America dominated the world economy are over. Just because we use 400.000 barrels a day less, doesn't mean the price of oil is collapsing.
IF we get a storm then I'm the first to admit all bets are off and $175's a real possibility, even higher perhaps. However if we don't get a turbulent hurricane and storm season then I think the market's going to bring the price back down before it continues through the $150 mark. Most people are betting against my view so time will tell.
theinvestingspeculator...
The world can only produce 85 million barrels per day while it is consuming 87 million barrels per day. The price continues upward until this equation balances itself. Unfortunately, at the present time, the first half of the equation is declining while the second half is expanding rapidly.
In the meanwhile, we need to be drilling all of our potential locations in the U.S. to try to slow the upward movement of price.
The idiots in Washington will continue to pander by putting up the oil company execs as an offering and telling the masses that we need to tax these evil corporations more. Why won't they just tell the voters the truth? It's because they believe the voters are not smart enough to recognize that corporations do not pay taxes.
Simply put, it makes no sense to tax something you want more of.
Energy costs are too inelastic to try to manipulate by tax policy. It will create too much hardship on the public sector and curtail growth .
hsgac.senate.gov/publi...
If speculators and institutions are the driving force prepare to see a serious correction. VERY good PDF.
The world can only produce 85 million barrels per day while it is consuming 87 million barrels per day."
Really now?? Then if Pickens is right, how come inventories are at average/above average levels in almost every single industrialized country in the world?
If you look at his hedge fund, about 95% is in either oil or natural gas. In my book, that is a biased source
Oil will be spiking to over $175 due to the real potential of strikes on Iran regime terrorist bases, as well as a naval blockade of Iranian ports at Hormuz strait.
Now, put that in your pipes and smoke it.
Really? Where are those numbers? I look at a lot of numbers, but I have never seen inventories above average, dude.
Look, dude: We are talking light sweet stuff, cause that's what we are trading.
NYMEX light sweet crude is a basket of north american sweet grades.
The important installation for inventories for this grade is Cushing, OK.
Last year at this time we had 27.4 million barrels, this year we have 20.6 million barrels. Now consider that the dollar of now doesn't buy a last year's dollar and you are where we are right now. There is nothing magical about 130$ oil!
On top of that there was this huge story in the Journal this week, about the IEA cutting its long term supply forecast. DO YOU UNDERSTAND WHAT THAT MEANS? THAT MEANS PEAK OIL IS BECOMING SLOWLY OFFICIAL!
Let's be optimistic. Let's say we are able to produce 95 million barrels 15 years from now. Assume that emerging markets rate of increase of oil consumption is half of what is now.(Still a lot!) I don't know, but if you ask me: It's gonna get close. The thing is don't think we are gonna produce 95 million barrels a day.
We need a recession in order to cut back demand. How high will prices have to go to destroy enough demand to lower prices? That's the big question.
also like iec.l and sbe.l --both russian oils--
even at 100/barrel all of these companies will easily fill your tank.
for a non-oil sleeper biui.pk for .12 you get $100 million in sale, book of .50 and cash/sh .11-1q 23 million and net of .09 ( include extra-ordinary) bottom line market cap of 1.2 million for rev of 100 million check it out otcbb listing soon read the q
Oil inventories start to recover, the consumer starts to consume more oil and gas products, then the inventories receed and the consumer cuts back consumption, a never ending cycle and coupled with the other occurances it spells a permanent change in our economy and in our way of life. Investing in ETF which short oil is a very unwise thing for the common investor, these funds (as some have already) could lose everything.