basehitz

Why Is Oil Trading at $53 When Supply and Demand Is So Bearish?

Oil did what it did for the same reason the market did wht it did. Da Boyz wanted a rally. So they grab whatever they think they can sell on CNBC and repeat the mantra until they get enough sheeple to support what they already own. Da Boyz then sell to the sheeple and do the reverse knowing the sheeple will eventually drive it back down for them.

On fundamental, I suggest reading the following:

For NG: 3/19/09 AP article entitled "Natural Gas: Weakness Borne of Strength". Interviewed J. Marshall Adkins, Director of Energy Research and Managing Director of Equity Research for Raymond James. He predicts a long term bull but near term disaster by this summer. $3 or even $2 he thinks is possible.

For Oil: a book entitled "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy" by Matthew R. Simmons (Paperback - Jun 5, 2006). He makes a compelling case that the world misconceptions about the true amount of reserves in OPEC leave us vulnerable.

With all the natural resources in the US, we seem to be determined to screw ourselves. Unwillingness to drill for our oil, plus Obama's war on coal, it seems we are really screwed. Then add the building storm between Iran's nukes and Isreal's tenuous position. And for good measure Obama's blindfolding the US on the war on terror.

Eventually, we are really, really screwed. And we will have done most of it to ourselves. In the meantime, Da Boyz will decide prices.

The Case for Natural Gas

Good post. Your comment "Few investment themes in this day and age have such compelling fundamentals."

We know supply oustripped demand, therefore the buildup in reserves and price decline. And that is all the popular media emphasized for a year. Then there was the fall off of demand. So let's break it down.

Industrial consumption makes up 30%, primarily chemical. That hit has been largely taken. Old news.

The next 20% (year round avg) is home heating. A last resort for cutbacks for most.

Power generation, primarily as peaking units. This plays into your theme on Obama favoring green energy. Obama has been critial of coal consumption and we know his stance on oil. So it seems the downside has been taken here and upside not yet counted.

Now for the good news. BHI rig count shows a reduction in gas rigs from 1606 in Sept to 1148 last week. Allowing a few months to impact supply, this has got to be having an effect. And it drops every week. The effect will grow. But NG storage is already comparable to last year and 5 year avg. So it seems to me that the media has been so focused on the old news of supply/demand imbalance, that they've (almost) all completely missed supply/demand is approaching balance while the rig count is being dramatically reduced.

SLB is considered a good indicator for this group. In their recent earnings report it (AP story) was noted.
"The recent years of increased exploration and production spending have not been sufficient to substantially improve the supply situation," Gould said in a company release. "The age of the production base, accelerating decline rates and the smaller size of recently developed fields will mean that any prolonged reduction in investment will sow the seeds of a strong rebound."

Commodity traders are notorious trend traders. I think they should spend a little more time looking at the change infundamentals that is occurring now and will drive the next rally.

As you said, it is hard to find investments with this kind of compelling valuation.