Tuesday, September 2, 2008

The Set Up

Last week, with Oil at $116 and a storm blowing into the GOM, I was tempted to buy Oil.  In fact, I was jonesing so bad I bought 1 contract friday morning and sold it friday afternoon - after I came to my senses.  Oil is not corn.  Corn legitimately trades on weather conditions.  Trading Oil based on the direction of a hurricane requires skills that most of us just don't have. Oil is now trading under $108 as I write this, and once again it reminds me that reaching for a falling knife is hazardous to your health.

Could a hurricane come that really spikes the price of Oil?  Sure, but it is not a high enough probability event to let that influence your decisions immediately before, during and after a storm.  There will likely be factors to be weighed in the aftermath that would influence your decision.

Right now Oil is still in the "shoulder period".  Technically, the chart looks terrible.  The OECD economies are contracting and the sense is that demand for Oil will contract driving money out of the futures markets.

This could go on for a time - BUT AT ANY TIME CAN REVERSE, HARD.

You and I will NEVER get the moment exactly correct (unless you get extremely lucky and then NEVER count on that again - you will have used up your once in  a life "Lucky Trade" (I already used mine).

The reverse will likely come before the end of 2008.  From what price?  I don't know, so wait.  There are few better feelings with your clothes on than sitting in cash and side stepping a colossal sell off.  And this feeling lasts longer than 8 seconds and won't get you into a lifetime of trouble.

All of my work tells me that a significant import shortage WILL hit the U.S. in the next 36 months.  That does not mean that it will be tomorrow, and it does not mean it WON'T be tomorrow.  Remember, the market is always right, and that you must never delude yourself into thinking that commodity speculating is investing.  It isn't.  Until that import decline seers itself onto the markets collective thinking the Oil market can continue to decline.

Still, under no circumstance would I go short.  The reversal will come and it will likely be brutal.

Yours for a better world,

Mentatt (at) yahoo (d0t) com


Donal Lang said...

There are two possible reasons for a reversal; higher demand for oil, or a collapsing dollar. I think both are sure bets, but timing.....?

There's only one reason oil will fall mediumterm - worldwide demand destruction beyond anything we've ever seen in our lifetimes. It would have to be destruction beyond the falloff in the oil available to market. Hard to imagine.

So I STILL say $200 oil by Xmas!

Greg T. Jeffers said...


There is a third reason Oil can continue to fall. Money coming out of the futures market, and that appears to be happening at the moment. It could reverse at any time.

For my money... I don't get in front of freight trains. I either get on them, or I get the hell out of the way. This one... I am getting out of the way.