While I have been VERY bullish on oil for the past 5 years or so, I would like to remind all who visit here that markets will zig and zag; they don't zig and zig and zig.
Commodities such as Oil, Silver, Natural Gas, Palladium, Corn have been zigging rather hard lately. The U.S. $ has been zagging for years and that trend will likely continue. Still, there will be interruptions in these trends.
Let's get back to Crude Oil: Will it reach $120 on this rally, $15 from Friday's close, or will it pull back to $90 (also $15 from Friday's close)? I have no idea - and anyone who tells you they are terribly sure about market outcomes in the short term are full of it. I could make the case that the "trend is your friend"... but which trend (and/or combination thereof)?
Trend 1: The trend in the past is that the second quarter is usually tough on crude. Winter heating demand ends in the Northern Hemisphere and Summer driving demand has not materialized yet (the "Shoulder Period").
Trend 2: Oil is priced in U.S. $'s, and $ is going down like rock in a pond, so Oil prices rise all else being equal.
Trend 3: OECD inventories are tight - VERY TIGHT. Builds in country "A" are for the most part offset by draw downs in country "B". Competition for tanker deliveries of oil is fierce.
Trend 4: Collapsing credit markets worldwide, and in the U.S. mortgage market in particular, are pushing much of the OECD to the brink of recession. When economies contract, energy demand wanes (actually, there is not as much support for that contention as one might think. With the exception of the oil supply shocks of the 1970's, no other post War recession caused 2 years of declining oil consumption).
Trend 5: Increasing consumption on the part of China, India, Vietnam, the Middle East, and Russia, etc... is intensifying competition for the declining pool of exported oil (excess production over consumption in oil producing nations is declining as the producing nation's internal consumption is growing briskly due to the positive feedback loop of: higher oil prices = greater economic growth = more domestic oil consumption = less exports = higher oil prices = ...)
I could easily enumerate a dozen more trends... but you get the idea. This is a tremendously complicated puzzle involving lots of moving parts. But the 2nd quarter will come and go, and maybe the credit crisis will, too. What about trends 2,3, and 5? Are they going away anytime soon?
Don't be a hero, but don't be afraid when opportunities present themselves, either.
Yours for a better world,
Mentatt (at) yahoo (d0t) com
2 comments:
I agree with you about the vagaries of the short term, but the long term trend is clearly upwards (for all the reasons you've stated here and in the past).
But one other thing can be added; Europe and Britain (and I'd guess everywhere else)are restructuring. We are buiding railways, energy plants, windmills, solar powerplants, zero-carbon houses (3 million planned for UK in the next 12 years), local mass-transit systems. Portugal plans to build for 45% solar and renewable power in 10 years, Egypt plans 50 huge solar power stations to supply ALL of Europe's electricity needs, etc, etc.... There are huge plans in the pipeline as we redesign our economies, but we've barely started yet.
The irony is that the renewable, post cheap-oil world, the shiny, new, zero-carbon world, will mean our using huge quantities of oil to build it!
Scalability and time frame will, in my humble opinion, be the key to successfully investing in those ventures.
I tend to focus on opportunities that will occur in my lifetime, as I am not involved with policy making.
The commodity boom won't last forever, but much of it will likely last for at least a decade. Historically though commodities tend to demolish neophyte speculators. For better or worse the commodity futures market is a zero sum game - for every winner there is an equal and opposite loser.
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