PAR

Options Trader: Tuesday Outlook

…..hmmm, very interesting. I’m flabbergasted. We’re to start in analyzing this commentary. I’ve never once commented on a single commentary on seekingalpha.com because frankly they’re a little silly and embarrassing for the mere fact that almost all of them argue in favor of whatever position the author is holding. Reading this piece however left me awestruck and I just had to respond. I guess I have to start off by saying that I’ve read Phillip Davis’ outlooks before and you have to commend someone for putting in the time and energy to give there two cents on market happenings each and every day. Some of the things he writes in this piece however are just absurd. Yes, there are market manipulators that try to sway prices in every single market. Is there a concerted PR onslaught by the mainstream media, backed by big-oil, to drive prices higher? I have no idea. What I do know is the author himself contradicts his supposed principles when after writing four-five paragraphs on the matter he then discloses “We are, of course, heavily short on oil as we called shenanigans early at $110 and pressed our bets on the way up but I’ve decided to point out how the news is being manipulated, hopefully to save some people from being victimized by the next bubble they try to stampede you into.” The author simply points this out because he wants to “save some people from being victimized by the next bubble they try to stampede you into.” Wow, what a humanitarian. It couldn’t possibly because he like many other oil traders have gotten absolutely obliterated on their shorts, (many have called a market top at $90, $100, and the most often recited $110 which took nearly a month to break through.)
I have no idea which side is correct on oil as market sentiment seems split 50/50. I don’t trade energy in any capacity and have no skin in the game whatsoever. I could care less if it goes up or down with a slight bias towards the downside since that would actually benefit equities (minus the energy sector), which I tend to trade the most. To say however that MEND is being manipulated or paid off by big-oil to cause disruptions that spike prices is preposterous. Now the rebels themselves may have an agenda, maybe they’re nefariously invested in oil futures through intermediaries around the world and then of course they would have an ulterior motive to their actions, but to say that there is a conspiracy by huge publicly traded companies that are incorporated in western nations with strict laws on such behavior is ludicrous. Yes, there is a bubble in the oil market, and yes it will go burst as all market bubbles eventually do. That however doesn’t mean that because the media reports on this bubble or some analysts think it will expand farther that they are somehow trying to manipulate the market. They’re just reporting a fact, the oil market is in a bubble right now and prices may continue to escalate for the foreseeable future.
According to the Lehman analyst who the author praises as the true prognosticator of oil, “hot money accounts for between $20 to $30 of the recent increase in oil prices and that about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year.” If that’s true and speculation accounts for roughly $25 of the current price of crude then on the supply and demand side alone with speculation completely stripped out of the equation oil should be at $95, from the current top of $120. So taking that into consideration with the fact that with oil today at $120, the drop in demand has been minuscule at best and with demand forecast to rise nearly every year on a y/y basis for the foreseeable future then if oil should be at the “correct market price” of $95 without speculation then if it simply follows the supply and demand aspect it will still continue to rise steadily and eventually the “correct market price” will be at the $120 mark it is today with speculation stripped out of it. What will the author say then?
Now I’m just a lonely day trader who doesn’t hold positions for more than a very short time usually, with the occasional swing trade here and there, so I don’t have a bias one way or the other. Oil may very well see a temporary pull back, maybe even all the way down to the mid to high 80’s. That doesn’t change the fact that every year more and more people procreate around the world and have children and those children eventually procreate and so on and so and so forth. Unless there is a cataclysmic natural or man-made disaster the world population will continue to swell with a vast majority of it consuming petroleum products and byproducts every single day. Demand will continue steadily upward until one of two things happen. Either demand will continue to increase until the very last barrel of oil is sucked out of the ground or the development and use of alternative energy sources will increase dramatically. Now it’s just me, but I don’t I think scientists and engineers have developed a way for heavy industrial machines such as planes and boats to run on natural gas or bio-fuels.
Even if world leaders completely abandon the third-world and continue with this ridiculous push to subsidize corporate farmers so we can take the worlds food supply and put it in our cars, (whish I highly doubt since food riots are beginning to flare up around the world), the implementation of putting the infrastructure in place worldwide to fuel our cars with bio-fuels would take an astronomically long time to put in place. Even if scientists somehow miraculously find a way to fuel our cars with a non-food bio-fuel such as bio-waste or even seaweed the technology as it stands today would be so astronomically high in price that it wouldn’t be feasible on a cost scale relative to oil to make it practical. If you’re telling me that if the Chinese or Indians are given a choice between bio-fuels or oil as an energy source and the bio-fuels cost more than the oil, that they are just going to pay more for the bio-fuels out of some sort of deeply held environmental principle, then you’re insane. The Chinese and the rest of the developing world have made it perfectly clear that they are going to industrialize and develop their counties by any and all means necessary, environment be dammed.
As it stands today I would like to know where we are going to get all of the oil that the world will need as each and every third-world or developing nation comes online and begins to industrialize. Are Caucasians and the West so arrogant as to think that only we have the will and ability to be industrial? Eventually all societies modernize, if they didn’t all of us would still be wearing animal furs, living in caves, and hunting and gathering to survive. With the exception of maybe one or two “lost tribes” in the Amazon, every single human society has progressed and modernized using the means available to them. Almost all of the means available to humanity today in order to build and run modern societies require oil. That worldwide demand will only continue to rise. Now if the worldwide supply of oil continued to rise to meet the escalating rise in demand then that is simple economics and prices would be kept in check. As we all know however oil isn’t an infinite resource. Once it’s all sucked out of the ground it’s gone. So that being a universal truism where are we going to get all of the oil needed to fuel a booming worldwide population? You could add together the find off the coast of Brazil, all the tar sands in the world, and send a deepwater drill into every last corner of the seas and it will all run out eventually. Now I’m not saying we’ve hit peak oil, even though Hubbert and nearly every other respected geophysicist has said we’ve either reached peak oil already or are going to sometime in the next 5-20 years, all I’m saying is that to somehow state that the worlds oil supply won’t eventually run out is delusional.