Monday, September 8, 2008

Whither Crude Oil?

I have been an Oil bull for years.  Years and years.  But this year we sold every barrel of the commodity, and I have not bought a single contract back for an overnight hold since we punted a couple months ago.  Pretty simple, really.  Oil got "overbought", and when everyone started talking about the inevitability of $200 Oil, I remembered my favorite American, Samuel "Mark Twain" Clemens' famous line:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

That pause saved me a great deal of aggravation, because we all know that market's zig and zag, they don't zig and zig.

So now what?  Oil is $106, and is in "flip a coin" land at the moment - could go to $80, could go to $125.  Worse, looking at the data, incomplete and inaccurate as they are, it would appear to me that it is very likely that Oil will enter a trading range for the next year, 18 months, maybe even 2 years (though I think 2 years a stretch).  Is the trading range $80 to $120? $70 to $130? Too many variables and unknowns at the moment for my money.

Still, this is a lot like hunting.  Patience is in order, and the moment will come to strike.  

Another question is: what will the shape of the futures curve look like?  Will Oil be in contango(later months delivery prices higher than the front month) or backwardation (the opposite of contango)?

The decline in the price of Oil, and the decline in the economies of Europe and Asia, have done wonders for the US$.  I will be the first to admit that I really thought that the long feared monetary crisis was upon us, and still wonder how the markets think the collapse of Fannie and Freddie are a positive...  Just think, let's blow up Lehman, Merrill, and Citi and get filthy, stinking rich!

In this regard, we are truly in the "Land of the Philistines". (Or at the very least members of the Great Native American "Wairdafukaawee" Tribe.  Perhaps you never heard of them?  They got their name after a long hunt in which they followed their prey night and day, through rain and darkness, only to finally pick up their heads and look around.  After a few moments their leader uttered the famous line which gave them their name. "Hey, where the f&%ck are we?"  And, to this day they carry their lineage with pride - The "Wairdafukaawee".)

In short, I have no idea where we are vis a vie the US$ because at the moment up appears to be down.  This can, and very well might, change quite abruptly.  Until then, it is tough to make a bet.

Not that the US$ has had any of its issues solved - it hasn't.  But currencies are a relative thing, and at the moment the economies of the other currencies are performing worse than the U.S. economy, and the U.S. in not doing anything to write home about.  And this is having an impact on Oil, which is supportive of the US$... When does this cycle start to spin the other way?  I can't say for sure, but I can say it will for sure, and deciphering that moment will be everything.

Soooooo, while the great bull market in Oil may not be over, this is likely to be a bit more than "the pause that refreshes".  Patience will be rewarded.  So will courage.  Because, "when you should be buying, you won't want to".

Things change, markets change, data changes.  The moment it does, I will likely be long Oil once again.  Could be today, tomorrow, next week, next month... but it WILL happen.

Good Luck!

Mentatt (at) yahoo (d0t) com


Donal Lang said...

We've spoken before about the elasticity of oil demand in the U.S. - for the summer months it has proven to be VERY elastic, and as the U.S. uses 25% of the World oil, and 60% of that goes on transport, it's understandable that declining demand has weakened the price. For the moment.

Also Europe uses half of the oil per capita for the same standard of living, so with some investment the US could probably half (or even better) its per capita consumption. But that requires investment, which is the problem for now.

The crunch comes this winter. Canada will need its own gas, Mexico is a net importer, and the international gas price is very vulnerable to Russian tweaking of the supply tap to Europe. A bad winter could quickly use up stocks and marginal supplies of oil AND gas, and drive up prices very fast indeed.

Then of course there's Fanny & Freddie: We all know that money supply is a product of honoured debts, and inflation is the devaluation of money. With a debt to asset ratio of 65/1 and a collapsing property market, there's no asset value left - effectively dishonoured debt. Its only a matter of how deep is the shit that F&F will bury the value of the dollar, and the Government with it.

The BEST scenario at the moment is that, by the time this has played out, the Middle East and Far East sovereign funds will own enough of America that they won't LET it go bust!

Bureaucrat said...

Sure was a coooold morning in Chicago today, and winter was early, and stayed late, last year too. But some people were still riding bikes to work yesterday. We'll see how long that lasts. The bus & train system is already taking about raising fares. I've gotta keep this damn expensive natural gas off .... somehow.

Anonymous said...

The markets reacted positively to the F&F takeovers because it is the opposite of what happened in 1929, when the response to the bursting credit bubble was to tighten credit. This is a damned if you do, damned if you don't situation. Do we monitize the hell out of this situation and end up with a bizillion worthless dollars or allow a credit collapse and end up with just a very few valuable dollars? We can end up just as broke either way.

The markets have decided that the approach in 1929 was wrong. That doesn't make the other approach right.

Coal Guy

Donal Lang said...

Re; Coal Guy
Either way, truth will out. I think the Fed is just trying to keep the shit from hitting the fan until Bush is out of office. Then, all bets will be off.

But the bottom line is; the $ is near-worthless, the U.S. is selling its companies to its trading competitors and selling its children's futures as debt-ridden wage slaves.

Or am I understating the problems?

Anonymous said...

>Also Europe uses half of the oil per capita for the same standard of living, so with some investment the US could probably half (or even better) its per capita consumption. But that requires investment, which is the problem for now.<

The US is already sucking up 80% of global savings. The US saving rate is negative with the economy moving into recession or even deperession. The financial system is basically broken.

To say that it would take a little investment to reduce US energy usage in half would seem to be a major understatement when we are talking about decades of time and 10s of trillions of dollars to make this happen. And this is before oil prices go on their ultimate upward rocket rise in the near future.

Anonymous said...

I don't think we're dead yet, but we gotta put the cap on flood of dollars out of the country. This means a couple of things to me.

First, we need to cut imports. Second, we need to start manufacturing things of value in the US again. It is more than just the oil imports, its about cars and electronics and furniture and shoes and chemicals and a whole bunch of other industry that has move off shore. I'm not a protectionist to the extent that we need to protect inefficient business from offshore competition. The UAW and the big three auto makers FULLY deserve what they are getting. Big Steel and the USW deserved what they got! When they closed the mill in my home town, the open hearth was 107 years old. With the lack of capital investment on the company's part and union work rules, it took 26 man hours to make a ton of steel in the US, and 9 in Japan.

I have no sympathy.

What does bug the hell out of me is that we allow our pollution and unsafe working conditions to be exported. Clean air and water, and safe working environments cost A LOT OF MONEY. To the extent that foreign competition spills their shit on the ground and allows its workers' hands to be chopped off and their lungs ruined there should be tariffs that offset the cost difference.

This "free trade" that we are suffering under now abuses American and foreign workers alike. There is no way any manufacturing in the US can win this battle.

All of our Ivy League economists have forgotten that money is only worth what you can buy with it. True wealth is ownership of efficient means of production. Our money has no value because we have stopped making things of value.

We have a good 20% of the working age population on the dole. If they became productively employed there would be and economic boom that would make your head spin.


Coal Guy

Anonymous said...

Coal Guy,
The dollars will stop leaving the country when the Chinese and the Saudi's stop taking them or they become so worthless that no one will take them.
Read Kevin Phillips book about the the financialization of late stage imperial economies. It is basically what happened to the Brits from about 1900 to 1918. They didn't accept that it had happened until 1945 or 1946.
As the modern UK shows today, there is life after empire.
The US just hasn't accepted it yet.
For 30 years, it has been borrow and squander. The bill is about to come due.