Thursday, September 11, 2008

The Set Up Cometh

"The world economy is slowing".  OK so far.  "The slowing world economy will cause Oil demand to fall".  Really? I can't find much data to support that conclusion.  Not since the 1970's Oil embargo has the world experienced year over year over year (3 years) declines in Oil consumption and only a couple of very, very small year over year declines.

The world vehicle fleet is growing, and 2008 and 2009 will be no exception.  Oil is primarily used as a transportation fuel, powering this growing fleet... is the fuel supply growing commensurate with the increase in the number of vehicles?  

The world's population, and the number of new energy consumers, increases by the equivalent 1 U.S. every 4 years.

That, in my opinion, is the "Set Up".  In order to make money in the markets in excess of Treasury yields one must think ahead, and think better than the other guy (and, no, you cannot hit every pitch.  Thinking that you, or your broker/manager/advisor is going to be right on every position/trade/investment will only get you into trouble.  Unreasonable expectations will cause you to make bad decision after bad decision after bad decision.  If this describes you, and in my experience it describes a lot of investors, you are better off with your money in a mattress).  Right now, the world financial community is undergoing a forced unwind of positions.  Some see this as a great conspiracy, some as the normal, and unpredictable, nature of markets.  Whatever it was that caused the snowball to roll down hill does not matter.  What matters is this:

Markets ALWAYS over do it.  They always overreact.  For some, this creates tremendous opportunity.  Oil became overbought.  Blame it on speculators if you like, and speculative bets certainly drove that market to extreme overbought conditions, but the REASON the speculators were speculating in the first place was because many, many market participants have recognized the Oil supply problem facing the world.  This problem is real, and it is immanent.  That does not mean that Oil will not soar and fall by greater than 35% from its average point in any given year.  I think that that will be the new norm, but that new norm is not that far outside the previous norm of something north of 25%.  It also does not mean that Oil cannot fall 50% from its trading high - it can.  It does mean that the traders that recognize the next bottom are going to make an awful, awful lot of money.

The Oil market in the U.S. has become an emotional and political football.  It is as if we are watching a sporting event, and we are rooting for our favorite team - cheap oil prices.  But like cheering your team from the stands, the impact of your rooting will not be felt on the field of play.  That will only be impacted by its participants. 

If the markets drive Oil prices down, and U.S. & OECD inventories and imports continue to fall, you have your set up.  Then the question is where on the futures delivery curve you place your bets.

Good Luck!

Mentatt (at) yahoo (d0t) com

3 comments:

Bureaucrat said...

Are you suggesting that all the fans for sporting events have almost no effect on the performance of the teams and outcome of the games??? Sure could have fooled me. :) Everybody else seems to think they have some impact on the game they are watching and cheering for. That's why I've never been a sports fan. Cheering the "team" is a waste of breath. I have no impact whatsoever on the athletes.

Greg T. Jeffers said...

Me neither. But then again, I have no impact on anything. And I am OK with it.

Bureaucrat said...

CNN I-Report has video from after a "gasoline-buying panic" last night when several NC counties were told the gasoline may run out due to the Ike storm