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Contemplations on Oil
After a tumultuous 2009, oil has been one of the least volatile assets of 2010, confined to a tortuous $68-$88 range, frustrating momentum players to no end. How many city morgues are packed with the bodies of those who sold every dip and bought every rally, vainly hoping for a break out? By Friday, crude was down 3% on the year, virtually, the only hard asset showing a negative number this year.
Oil traded like it was on Ambien because it spent most of the year discounting a double dip recession. Bloated inventories encouraged hedge funds to build up substantial short positions. Some traders were targeting prices as low as $40.
After last week’s sudden burst, it now appears that this crucial commodity is stretching its muscles, limbering up, and getting ready for a serious move. The short position started to go badly wrong in early September. Forecast hurricanes failed to show. Wells in Nigeria, America’s third largest foreign supplier, started to explode again. Word has slowly been seeping out that the net effect of the BP oil spill, and the industry curbs that followed, will be a cut of one million barrels a day of Gulf production fairly soon. That is about 5% of the country’s total consumption.
Then Ben Bernanke threatened to launch a hoard of helicopters dumping money on the economy reminiscent of a scene from the classic Vietnam War flick Apocalypse Now, smothering any prospective double dips in the crib. All it took was a surprise plunge in inventories last week, and the short covering was off to the races.
A serious run on the dollar has added fuel to the fire. After running up virtually every hard asset to unimaginable heights in such a short time, investors desperate for returns in a zero return world are now rotating into Texas tea as a laggard. Until Ben Bernanke figures out how to make a barrel of oil with a printing press, money should pour into oil, as it has already into precious metals, industrial commodities, rare earths, and food.
I have always viewed any weakness in oil as temporary, and urged readers to accumulate positions on the cheap on many occasions. This extends to longs in the Russian ETF (RSX), the world largest oil producer and a major exporter (click here for “Buy Russia When Oil is Cheap” at http://www.madhedgefundtrader.com/september-10-2010-3.html ).
I must confess that I am an out-of-the-closet, card carrying “peak oiler”, and believe that it is just a matter of time before we punch through the 2008 $150/barrel all time high (click here for “The Price of Oil is Going Up” at http://www.madhedgefundtrader.com/august-5-2010.html ).
Avoid the ETF here (USO) because the tracking error is so huge. You would be better off buying my picks in the industry on any dips, including Chevron (CVX), ExxonMobile (XOM) (click here for “Pick up Big Oil While it is Still Cheap” at http://www.madhedgefundtrader.com/august-2-2010-3.html ), Occidential Petroleum (OXY) (click here for “Looking for Value at Occidental Petroleum” at http://www.madhedgefundtrader.com/july-7-2010-2.html ), and ConocoPhillips (COP) (click here for ConocoPhillips Looks Like a Steal” at http://www.madhedgefundtrader.com/august-17-2010-2.html .
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Its only a matter of time before the price of $150 is taken out. The coming decade is going to be the decade of spiking commodity prices.
Silversem
http://www.goudbelegger.com
Kudos!
Why is it that the people that I recognize from TOD are the only ones that really get it? Very well put....
Interesting, MHFT, thanks.
Most miss the important feedback loop; returns on the 'use' of the oil pumped out of the ground are what drive prices in the longer term. Little or no returns at any given price and that price becomes unsupportable. The price that allows returns is very much lower than most people think; our 'use' infrastructure was built and financed with ultra- cheap - $35 inputs in mind.
At the current 'base' price for oil ($70/bbl) only certain uses are profitable. Uses that require cheaper inputs have already been removed from the marketplace (see 17% U6 unemployment which is the consequence). A higher base price removes more business activity; this is the feedback that drives down the price of crude.
Only speculators are able to drive the price upward without regards to demand which is fixed by returns on use. Since most crude use is waste the marginal returns on waste are slim, indeed.
The upper bound, where the price of crude reduces activity enough to cause a recession would not be higher than the average price for 2008 - the year of the 'Great Price Spike'. Since that price was $99 a barrel that price would have to be the upper bound.
In fact, since global output has shrunk significantly since then, the $90 price is probably unsupportable, not leading to a crash per se but crimping business activity enough to spill markets.
Right now, the current demand does not seem sufficient to challenge the $87 price set in June of this year. The world has become much poorer: $85 may be the new $147.
Nice. The Russian ETF is going to be mostly Gazprom (suffering since advent of shale gas/Omani capacity dropped prices), Sberbank (almost as fucked as some yank banks), Rosneft and Lukoil neither of which ever seem to raise production and both of whom fanny around buying shitty downstream assets. What a dumb way to play the oil price.
Get some balls and buy some OGX, Dragon or Tullow fer Chrissakes.
When it closes above $84, I'll start getting interested.
"Word has slowly been seeping out that the net effect of the BP oil spill, and the industry curbs that followed, will be a cut of one million barrels a day of Gulf production fairly soon."
What is your source for this?
This would be a cut of almost 20% of US production ... including the North Slope,
the Bakken, West Texas, and all ... doesn't seem real likely to me ...
Also, when anybody starts talking about oil over $100,
they must be discounting a whole lot of truck-driving, gun-totin americans,
many of whom are out of work and all of whom believe that cheap gas is guaranteed by the U.S. Constitution. They are liable to have something to say about it at some point ....
Finally, if you don't enjoy the built-in decay over at USO,
there's a pretty obvious way to turn it around to your advantage.
I'll let you work it out for yourself ...
It all depends on your timeline. No doubt that at some point in the future oil will be well over $150.
Not sure what the driver is for $150 oil but nice to see that you have figured out that USO is a fraud. Just to help you out with your analysis of the energy industry, electric cars are not the future.
USO is not a fraud, they are very upfront about the fact that if you go long the fund you will lose 2% (or so) per month via contango rollover. Just use that to your benefit - short USO when you want to go short, and short SCO when you want to go long.
Good point. The tracking error with spot, that I have observed, is usually to the low side which also would help if your short.
Oh MHFT, how you are despised for your shameless self-promotion on zerohedge.
I do think, however, that you discuss some important points in this post. Peak oil is very real and is one of the reasons why the permagrowth Keynesian economic paradigm has crashed.
We share some common views my friend. Will you, the mad hedge fund trader, join me, the mad hatter, at my texas tea party? i do believe we shall have a jolly time.
I don't agree - the oil price has been discounting war with Iran, not a double dip. Longs have been increasing worldwide oil storage to near record levels, and they can't continue to do that forever. At some point, you run out of places to put the oil.
don't here of many short sellers in this space, do ya.' ahh, to have been a Rockefeller and had this realization! By the time this family had "run their course" (one is a US Senator from WV of course) they called the entire city of Cleveland a "monster." That was meant as a compliment of course. It is the "heart for rock n' roll" no doubt.
When oil hits 86 = SHORT
Thank you for the Bernanke Apocalypse Now idea. You are right about peak oil long term.
What the traders do in the short term is just terrible jazz (i.e., Kenny G music).