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.
Mentatt (at) yahoo (d0t) com
Posted by The Short Story Man at 6:32 PM