Monday, August 11, 2008

Close, Very Close

The Oil market is close to a bottom, UNLESS the U.S. releases Oil from the Strategic Petroleum Reserve - or threatens/promises to. Short term bottom or long term bottom remains to be seen, but my bet is Oil does not break $107, and when the rally comes Oil could move $15 in 1 week, and $25 in a month. August is a notoriously difficult month to be long Oil, and this year is proving to be no exception. But winter is coming, it has not been called off. The refiners MUST buy crude now in attempt to beef up stocks of heating oil and other distillates, and in fact distillate inventories are about 6 million barrels ahead of last year, while gasoline is 6 million behind, and crude about 43 million behind.

So why was the sell off so bad? I dunno, why was the rally so good (if you were long, that is)?

Let us get back to the numbers. With gasoline so expensive, why do we have less in inventory than last year? If their was in fact demand destruction, shouldn't this stuff be piling up? And what is up with the doubling of "Blending Components" over the past 4 years? " Blending components" means, for the most part, ethanol. Ethanol was not part of "Total crude and petroleum products" 4 years ago (just click the data range to the right of the table). So the 5o to 60 million barrel increase in blending components is ALL ethanol. Shouldn't we subtract that amount from the Total (988,327,000 - 60,000,000 = 928,327,000) in order to compare apples to apples? And since most cars cannot use E85 all that ethanol is illusory in terms of petroleum inventories. I can't find a first week of August from 1990 to present that has fewer barrels in inventory.

"On the other hand" Oil might not be at a bottom with the potential of an Obama victory. A President Obama would most certainly follow through on his campaign promise to release 50mm barrels from the Strategic Petroleum Reserve. This is a "one off" event but must be taken into consideration. Of course, OPEC WILL ABSOLUTELY respond and take that 50mm off the market over time. Aside from being the DUMBEST idea since the Edsel, from an environmental (those 50 mm will wind up in the atmosphere), economic (this is a patch, not a solution, and only stretches the rubber band that much further), and national security (the SPR was designed for supply interruptions, not high prices and political payoffs) point of view, I have NO DOUBT Obama would carry through with that particular promise.

As you can see, there are a lot of moving parts here.

So, until the end of the sell off in Oil, the commodity markets are going to be too treacherous a place to participate in. And we won't know where oil bottoms with the threat of government intervention in the markets, futile though it might be.

Still, in the end it is all about Oil imports. They either rise, or they decline - as they have for well over 1 year. No point in being a hero. All will be revealed in due time, and somewhere in there I am going long Oil into the U.S. Great Oil Import Crisis of 2010 - 2012.

Good luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

Interesting blog. Being an amateur investor myself and also being in the process of loosing most of my savings since I am long from 125, it makes me feel a little better to hear that even the proffesionals are getting it wrong right now. The big question is, do I cut my losses now, or do I just hold tight? In view of an Armada heading to Iran I guess I am going to take my chances and hold:

Greg T. Jeffers said...

We sold our oil several weeks ago, after watching Nat Gas get hit, we figured Oil would not be far behind.

I don't give investment advice in this forum, this a Freedom of Speech Blog, not a solicitation. You won't find any advertisements here any time soon.

I can give you one, very important, bit of career advice. When you are right, hold until its stops. When you are wrong, sell as quick as you can. You can always buy it back (or sell short once again).

That is, unless you really know something special and you have 15 years to be bourne out.

Good Luck!

Anonymous said...

My bet is that I know something special about oil (99% of the world always finds things that I find interesting uninteresting), and I have 15 years. :)

Anonymous said...

Thanks for the advice man. I guess I fell into the trap of just holding a little longer and waiting for the bounce, so missed the quick sell. Now a sell is painfull, so the decion becomes harder... Sell now and loose a lot, or wait and possibly lose everything but at the same time run an equal chance of not loosing anything.
I am happy I dont do this for a living.

Donal Lang said...

Consumers have choice about buying fuel for their cars; they chose not to, the 'Driving Season' became the 'Let's stay at home and plant vegetables' season and so demand fell.
Consumers have much less choice about buying heating oil, and can't put it off beyond October. That should stir up the market and then ALL the news will look like bad news - if you are just a consumer!
And I STILL say $200 oil by Xmas!

auke said...

i read your blog almost daily
do i like it because it's close to my own observations ? probably.
anyway giving words to ideas and feelings helps people like me clear and define my own position .
dank je wel

auke de waldpyk

Greg T. Jeffers said...

Hi Donal!

$200 by Xmas is a bit of a stretch, but you never know...

I think Oil will average $150 next year, my partner is little more conservative at $145. We both see a $34 standard deviation, implying the possibilty of a $185 peak during 09. Of course the deviation could be +$70 and -$35, and then you would be more than right.

Good to hear from you.