Is It Time to Bet Against Oil?

Over the last week or so, ever since oil topped the $140 mark consistently, I have been tempted to recommend a short position on oil. Today, after two days of oil selling off, I am still in a conundrum.

Let's review why oil is where it is:

1. Demand story is still very much holding true with China and other developing nations building out their oil reserves and infrastructure.
2. Dollar is weak. It is safe to conclude that the dollar has contributed at least $20-30 increase in the price of a barrel of oil over the last 6-8 months.
3. Global instability has never been more of a factor. Venezuela, Nigeria and Iran remain a threat to the US oil supply and Israel's recent tactics towards Iran have not helped matters.
4. Speculation is at large. Successful traders have been shorting financials and buying oil contracts therefore driving the price of crude oil to unimaginable heights in a relatively short period of time. Hedge funds reeling from the losses in the financial sector have also turned to energy and in doing so have driven up the price of oil.

So what is changing? Well, demand is starting to taper off a bit. India's economy has slowed down, as has Eastern Europe. China, too, looks to be slowing down, although not by much.

Dollar weakness continues, but the sell-off in commodities, if it turns out to be more than just your average pullback, indicates that the dollar might be done going down. Moreover, the Fed has recently done everything in its power to help the economy by injecting money into the market. Rates cannot possibly go any lower and there isn't much more that the Fed can do except to raise rates to curb inflation. That should increase the value of a dollar, which should help bring down the price of oil.

Global instability is really the only X-factor. It does not seem to be going away and will continue to harass the oil markets.

Finally, speculation is only as good as the last trade. If oil declines a little more here, the same traders will start shorting oil. At that time, I would anticipate the financials to start recovering meaningfully as well.

So what do you do with oil now? I certainly wouldn't be long oil here, but I wouldn't short it here either. We need to sit tight until we see a trend emerging.

Full Disclosure: I do not own oil in my portfolio but my position can change anytime without notice.

Comments

[fxtrader07:]

the oil price these days is all about perception. oil as such has no intrinsic value that you could refer to. it doesn't earn anything. all there is it goes up and down in price.
lots of people were piling in under the impression that $200/bl is a surefire thing over the next 1-2 years. but mybe the peak-oil hype has hit a brick wall for the time being.
short oil - long high quality oil stocks like COP, TOT or OMV(Austria) or long selected u.s. energy trusts should work out just fine over the next 2 years as those companies will make tons of money - wjhether oil stays flat, rises a bit further or even declines to 100-110

2008 Jul 09 05:13 AM

[Aly-Khan Sa...:]

Oil is the most accurate barometer of Geopolitical risk, especially in the Middle East. Sabre rattling by the Israelis first and now the Iranians will keep the market on the boil until Bush and Cheney exit the White House. I would err on the side of buying PUTS [1 year expiry] on a 'black swan' event that drives us upto the $170.00 area, if that happens.

Aly-Khan Satchu
rich.co.ke

2008 Jul 09 05:35 AM

[mangolfer:]

Good atricle. Yes, it's time to get out of oil.

The most telling feature of a world awash in oil is the following statement from an Aramco manager from a recent story by the New York Times on the Khurais oil field in Saudi Arabia:

“We’ve asked all the international oil companies that buy from us if they want more oil,” Mr. Nasser said. “But we can’t find customers.”

So, where exacty is the shortage again??

2008 Jul 09 07:49 AM

[DONE_SONZ:]

If oil were to drop to say 100 bucks and gasoline were under 3 bucks,do you think people would be "conserving"?The answer is no.The problem remains.100 doesnt seem so exspensive anymore does it.140 wont either down the road.

2008 Jul 09 08:02 AM

[oilandgaspr...:]

The way things are going I would not bet against the price of oil hitting the $150/barrel mark by september but I think it will settle at circa $143. Editor, oilandgaspress.com

2008 Jul 09 08:14 AM

[oilandgaspr...:]

The demand from India and China alone, as there respective middle class expands more than guarantee that the price of oil will continue to rise. Its a supply and demand issue as well and as long as there is conflict in Nigeria , Iran, Russia and Venezuela supply will be restricted. editor, oilandgaspress.com

2008 Jul 09 08:19 AM

[Richard Whi...:]

The Peak Oil Debunked blog has some interesting facts about oil demand that support the anecdote mangolfer posted here. The U.S. decline in consumption in the past year (800K+ bpd)has wiped out the rise in consumption in the same time of China and several other countries combined. Oil consumption has already peaked in most western economies, and even China.
Does anyone notice that, when oil dips, Iran rattles its cage? Saddam in his day worked the markets better than any trading turtle ever did, blustering to get a higher price, selling into that peak, possibly even shorting and then making nice with the U.N. for a while to cover. Then he would rinse, and repeat. Iran is copying the master. They have a lot of VLCC in port full of oil.

2008 Jul 09 10:45 AM

[cdcaddy:]

Until we have a sane and workable energy policy [which will take a while given our current Congress], a pull back in consumption will/could help stabilize oil at the $100 to $140 range. Face it - OPEC has their hands in our pockets and now that the price is where they
have wanted it...they will be hard pressed to see it fall. It wasn't by accident that Iran just launched a long range missle - and new fields will only fill in the gaps of those fields that are now lagging in production. There are so many factors in the price of oil now including the growing cost to find it - then extract it. Cheap oil is years away...but if anyone can find a way to replace it to some degree - it is the USA. Necessity is the mother of invention.

2008 Jul 09 10:50 AM

[Paul Killinger:]

Richard,

Exactly!

2008 Jul 09 11:17 AM

[Paul Killinger:]

While the Saudis are trying to talk prices down, Iran and other outlaw Arab states are doing their best to move them in the opposite direction. Only a full-court domestic energy exploration press by our country can stem this tide, which will NOT HAPPEN so long as the D's run Congress.

2008 Jul 09 11:24 AM

[Paul Killinger:]

In the news today... Speaker Pelosi (D-CA) is once again calling on the President to open the SPR to bring down oil prices. At the same time, however, she's not permitting ANY energy legislation to come to the House floor for fear of a vote on increased domestic energy exploration. She really must believe the rest of us are as stupid as her constituents in California. Or should I say as disingenuous...?

2008 Jul 09 12:34 PM

[richjoy:]

OK, let's open the SPR, drain up to 50% of it by auctioning it to all bidders. (a) How will that affect pump prices when refiners need a greater margin? (b) Can you think of a worse time to drain the SPR than when it looks like there will be an attack on Iran? (c) If attacked, what happens to oil supply and pump prices when Iran closes the Straits of Hormoz? (d) If you think expensive gasoline is your MOST SERIOUS problem, what will you think is your most serious problem when the pumps are dry because the SPR is dry, and there is no gasoline at any price?

2008 Jul 09 03:35 PM

[Faisal Laljee:]

One thing to understand about the Saudi's is that they and the oil producing nations have it in their best interest to keep oil priced moderately high, but certainly not exhorbitant. I would think they want oil to be around $75 or so because its the sweet spot where they will keep making lots of money and governments around the world would be too passive to consider alternative sources too seriously. How often do you hear T Boone Pickens wanting to buy wind energy, coal and solar energy sources?

I do agree that we will get used to $140 per barrel, just like Iraqi's got used to Saddam, Afghanis got used to Taliban and we got used to Bush and his policies. But I am not sure if "getting used to something" is how we want to be.

2008 Jul 09 04:21 PM