Oil Bubble? Nope
Man, did I ever miss the party. Congratulations to all of you who have been bullish the United States Oil Fund LP ETF (USO). This has been one heck of a run. After going over and over the current situation, I have a belief as to why this has and will continue to happen over the rest of the year.
I used to believe that it was a supply and demand situation, or, with reference the peak oil theory, that we were running out of areas to get oil and thus we would decrease inventories. Some of this holds true, but not for this reason exclusively. It has more to do with decreasing supplies at the current larger reserves. Then I thought it was a dollar trade, which it should be, seeing as we are the largest user in the world. If you look at other inflationary issues, they are letting go as the economy seems to have a little more stability these days. Both of these are good arguments, but I have one that is not heard of much and will continue to add to the situation going forward.
Last week, the Saudis increased production by 300000 barrels a day. This was brushed off as if it didn't happen. Also, there have been better manufacturing and jobless data strengthening the dollar and looking to improve our current deficit in the near term. This didn't knock down oil pricing, either.
The hypothesis I have garnered over this short period of time has more to do with current economics. The United States' economy will probably stay one of the greatest for as long as I am alive, and that is because of its diversity. We produce so many things and are the best consumers in the world. We saw that we did not have the oil reserves to meet our increasing demand and so the US implemented the production of ethanol. Any investment person will tell you that this is a short term effect, and on paper it shouldn't work. But I think it will. Brazil's example of producing all of their energy needs through ethanol won't work for us, since they use sugar cane, which is much more cost effective; we produce ethanol from corn because we have so much and will, for a second year, produce as much as we did when we were supplying the world with food during WWII. This production, along with other agricultural commodities we produce, will increase in price and enable us to increase profits here in the United States.
It is not just an economic reason for bringing money in, but it will also cause the dollar to improve, as others have to pay more for our goods that they are importing. It is even more important to remember President Bush's meeting with the Saudis some time ago. The Saudis decided not to pump more oil to help the US economy, so now we are going to use our corn and make it more expensive for the world to buy food, thus placing inflationary pressures on their economies as well.
The beauty of this scenario is that inflationary pressures with respect to food can be much more powerful in economies that are not like ours. If you live in the United States and make $50,000 a year as a family, your food bill will be much less percentage wise than it would be in you made $2,000 a year in China, or better yet the Middle East. These pressures will be felt and at some point there will need to be more oil pumped.
Don't get me wrong; I have other reasons to be bullish this commodity, such as the race to increase our strategic reserve as China is does the same. It could also be all of the emerging markets that now want to own vehicles, or global infrastructure companies buying more machines to build more things overseas. No matter your reasoning, it is smart to stay bullish on oil. It is tough to argue with Goldman Sachs.
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This article has 26 comments:
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whisperonthewind
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231 Comments
May 18 07:59 AM-
BookValue
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8 Comments
May 18 08:56 AMSince 2003, the number of open futures contracts has shot up over 200%, and the daily number of contracts traded is up over 300%. Prior to this big jump in oil futures contracts and trading, there was a 75% correlation of the year over year price change in oil to the year over year change in oil inventories (higher inventory, lower price, and vice versa). Now, that correlation has fallen to ZERO. When the price of anything disconnects from fundamentals and trades on momentum and sentiment, you can be assured it is speculation that pushes the price into bubble territory.
ICE's power outage last week demonstrated this. While their electronic exchange was down, the price of oil started to collapse on other exchanges. Then as soon as ICE was back on line, oil pared its losses to close flat for the day.
$120 oil is unsustainable for any extended period of time, because anywhere above $80 gives the US the largest oil reserves in the world in the oil shale wastelands of Utah, Wyoming, and Colorado.
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CaptBob
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198 Comments
May 18 09:04 AMOur greatest use is for transport, and that we can substitute for.
Corn ethanol will stop as soon as the Politicians start to look foolish for backing it. It is a blunder, hurry and move to something that works.
One thing we know works is electric. Bio-diesel has great promise.
What we need is time. Since we can't recoup the time we wasted we have to --1. Conserve the oil that's left. 2.Drill to supplement.
3.Stretch using ethanol. But not corn--sugar.
Since everyone has beaten us to contracting with Brazil-(Japan).
90 miles from our shores lies what was once the worlds largest sugar producer. In the late 1980's still third and the largest exporter.
It's a desperate country, desperate to improve it's economy, desperate for jobs, and desperate to rejoin the modern world.
If we can't make something work with Cuba that they desperately want---Then shame on us, we deserve to walk. Think about it.
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bearfund
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546 Comments
May 18 10:53 AMMore interesting options include cellulosic ethanol, biodiesel as you note, and - pounding this drum yet again - increased urbanism to reduce the demand for transport fuels in general. Walking is not bad or shameful. It saves you money now (no fuel) and later (lower medical costs). Since when should anyone be ashamed of saving his own money while eliminating carbon output? Help yourself, help your country: move to an urban core and start walking. And keep after those other solutions, because we still need fuels for everything from power plants to delivery vans. The three best places to invest right now are urban real estate, biotech, and oil and gas exploration. In that order because of valuation. Don't overlook the first of these. If you want a powerful 50-year investment at a depressed entry point, look no further.
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legmaker
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85 Comments
My Website
May 18 11:21 AM-
Jack Yetiv
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442 Comments
May 18 12:09 PMShort-term (over the next few months), I think oil is more likely to see $115 than $140.
Longterm, as the US economy gets back on track, and the BRIC countries go back to 10% growth, demand will outstrip supply, and oil in 1-2 years will very likely exceed $150.
Let me also strongly disagree that oil is likely to go to $80 anytime soon. First, given the increased costs of oil and gas leases, and costs of drilling and other technical services, and given the cost of EOR (enhanced oil recovery techniques) as well as the elimination of the low-hanging fruit (monster wells that cost only a few dollars per BOE to produce), I believe $80 oil is not sufficient incentive (although we are not far apart--$90-100 oil is sufficient incentive).
If oil goes back to $80, capex programs of many of the oil companies will be DECREASED, thus reducing oil and gas production and increasing the price.
But, there is an even bigger reason why oil will NOT go below triple digits again: OPEC and Russia, which collectively control nearly 50% of the world's oil production, will NOT let it.
Based on comments from OPEC over the past few months, I essentially guarantee that if oil starts heading toward $100, Saudi Arabia will REVERSE the extra 300K barrells of production, and will REDUCE more.
OPEC loves oil at $110-120--and maybe even at $130 or $140 (but not higher for now)--but OPEC will NOT stand for $80 oil ever again.
Jack Yetiv
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NOWHEREMAN
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1500 Comments
May 18 01:05 PMTar is tar, you can call it oil sands or shale oil or sludge...whatever. It cannot be refined by most refineries around the world let alone in the US. The US has the technology to build refineries to handle the sludge but will not act until $150-200 WTI is upon it. By then even if the "not in my back yard" and EPA are silenced, it will still take 2 or more years of multiple projects, multiple states to make a meaningful difference. Not gonna happen.
With Democrats in power and listening to what the World has to say about using food for energy, look for corn ethanol production to die sometime in 09'...with BO in power, a war in the Middle East is probable.
The only way oil goes below $100 is if a worldwide recession occurs. This recession would have to include the BRIC nations.
I look for China to accelerate treasury sales in the coming months to fund the energy related imports they will need for the rest of 08' going into 09'. Everything from oil to coal to diesel to food will be imported. The Baltic Dry index jumped over 10% last week to a new all time high. Multiple nuc. reactors were powered down, hydro power has been compromised, ditto coal production...they have the external reserves to rebuild the quake area at the same time as keeping a 10% GDP in the rest of the country. Image rather than inflation will be in focus.
Oil above 130 then 140 then 150...whatever it takes. The Politicians will grumble, scream and rant, impose a Chavez type tax and to their dismay oil will march upward.
I decided a long time ago to get rid of my oil companies in the US and switch to Canadian, Australian, Russian producers because I felt the stupidity of the 70's would be revisited.
Where does our Economy go if Oil moves to $150 and beyond and stays there. Look at the 70's.
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Norman Lepoff, M.D. (retired)
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262 Comments
May 18 01:17 PM-
Paul Killinger
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1015 Comments
May 18 01:37 PM-
ArtfulDodger
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133 Comments
May 18 01:48 PME.g., there is a "New World Order" in oil. We should be following Jimmy Carter's advice from the late `70s. The world is running out of oil and other resources. There is a population explosion! Peak oil has come and gone.
All I can say is, these children must not have been alive in the 1970s when these shams were first run on us. And the poor soul who thinks we ought not go against Goldman Sachs' advice must be a mere pup and ought to go back and test their tout record before he makes another investment. These people are out for themselves—not the everyday investor. To them we're simply suckers waiting to be fleeced.
There is enough oil to run the world just as we're running it for another 150 years, and there's enough coal to run it for twice that long.
China and India are using only a small amount more today than they were five years ago. Granted, China is buying a lot of hard metals, but they'll over supply themselves before long, and prices will crash.
The jack up in commodities (especially in oil) began when the Bush Administration started beating the war drums to attack Iraq. Next came the take over of Congress by Devilrats who lied and ran to the right of their Republicrat opponents. Oil and gas prices have since more than doubled. (See here for how Senator Chuck Schumer and Congressman Rahm Emanuel ran the 2006 mid-term election campaign for the Devilrats and had their candidates lie their way into office by running to the right of Republicans: www.anncoulter.com/)
Since the above two events took place, oil and all other hard commodities have become the main vein of the Momentum Investing crowd. Wherever there's an ounce of money, there they show up and their cohorts on the "business" shows begin pumping those sectors—repeating over and over their false and phony reasons why oil can't go down and commodities will never sink. At first, you can go in behind the momentum players and make some money, but they always overplay their hand, because they're super greedy and they know the public will buy into their cons.
Don't fall for it at this late stage! The Goldman Sachs call for $200 per barrel oil is indeed the clarion call for experienced investors that the oil boom is nearing its end.
Jim Cramer—who now has a show called Mad Money—at the time of the dotbomb explosion was on FOX, where he pumped tech stocks right up to the first bust out day: March 10, 2000. He has moved away—slightly—from his pump and dump past, but he's a good example of how the financial media promote high-priced, high-debt-to-equity stocks to the public.
These momentum players and their cronies in the media can keep markets irrational much longer than anytime in the past—much longer than most of us usually think—and that's what we have today. But when they pull out, prices crash much, much faster than they rise.
Indeed, when they finally move to other sectors, all of a sudden the world will be flush with oil and all hard commodities. It's happened before and it's going to happen again. They don't vary their gameplan too much, because the public keeps going for it over and over.
People listening to this we’re-running-out-of-o... nonsense and this “peak oil” has passed blather will get murdered, just as those who listened to the dotbomb promoters who got on TV and pumped companies that had no money and no earnings and no business plan got killed. I figure about sometime mid-summer or perhaps even sooner we'll see the energy play bust out—soon thereafter will come the commodity dive.
Those of you falling for this trite better move your money elsewhere unless you want to end up like the millions who thought the Internet and anything connected with it was the end all to making money. Invest in sectors that these con artists are not in, and you'll be better off.
And pour a full bottle of salt down with every bite you take from the financial media. Promise yourself that under no circumstances will you buy anything that these promoters mention—you’ll thank yourself later on if you do that.
Rebeldog
See here for the latest US Geological Survey on the huge oil reserves in the Bakken: energyandcapital.com/s...?...
See also "What Energy Crisis?" by Daniel Yergin
See this excellent work on where oil and coal actually come from: "The Deep Hot Biosphere: The Myth of Fossil Fuels," by Dr. Thomas Gold
See coal reserves here: xist.org/charts/en_coa... (The best estimates I can find about coal is that the US alone has enough in-ground to last at least three-hundred years burning at the rate we’re burning it today. Lasting even longer will be no problem because we’re inventing more efficient ways to use coal every year. Once a very dirty source of energy, we’re now burning it cleaner than ever. With technological discoveries taking place nearly every day, the trend for carrying us into more efficient and even cleaner coal usage will continue—barring government intervention.
But that’s the problem. Natural gas and nuclear power concerns have the money and the lobbying power at this point. On top of that, leftist “environmentalists” have blackened coal as an energy source in the world’s eyes. So instead of turning toward our greatest natural energy resource, we’re moving away from it.
Could nation-building also add to the reason we’re not using our coal and buying energy from other countries? Jimmy Carterites certainly love buying from poor nations to build them up and that in turn sneakily transfers America's wealth abroad. The American people hate foreign aid, and high oil prices are a perfect way for the nation-building politicians to covertly send money to the Third World. Rebeldog)
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Paul Killinger
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1015 Comments
May 18 03:01 PM-
yank
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99 Comments
My Website
May 18 03:07 PMNice try but there are countless ways to indicate that you are wrong about your call for a commodity bust. Let's go over them:
1. "China and India are only slightly increasing their consumption of fuels".
Not exactly. Last month (April) marked another record month of oil imports for China with a 9% increase over comparable period last year. India is also growing oil consumption n the high single-digits. These trends are supported by the National Govt. there "subsidizing"... gasoliine by artificially depressing pump prices.
2. Yes there is oil out there to supply us for quite some time. But the problem is its in hard to reach locations 9,000 ft below sea level or in locations where resource nationalism makes drilling too risky.
3. Current lack of "substitutability... of oil is a major problem. Almost 90% of our economy's products are petroleum based and most scientists concur right now there exists NO suitable or economical substitute for oil.
4. When you look at the advance of oil prices from a "technical" perspective several analysts feel that there is more "room to run" for oil prices. Mainly they cite the case when any sector remains in a long-term downtrend (see commodities from 1980-2000) when it eventually breaks higher the recovery period is equally as long as the downtrend. Translation: This commodity bull has at least another 10 years to go before supply/demand equilibrium is restored. Don't believe me? Go talk to Jim Rogers or Louise Yamada. They have the explanation in further detail for you.
Bottom line: This commodity bull market has absolutely NOTHING in common with the housing or dotcom bubbles. Nothing at all.
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MNSL
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34 Comments
May 18 04:05 PMHistory has proved no asset has appreciated continuously for ever. We had tulip mania, gold mania, technological mania, real estate mania, art and commodity mania time to time. We no what happened to those asset classes and many became bankrupt.
Commodities are cyclical in nature. On the other hand when prices go up their will be less demand. So automatically prices will adjust later on. Same thing is happened to stock market. When it developes into bubble stage it will burst accordingly. Always few intelligent investors are correct when we compare with market crowd. Commodity market is in bubble stage now. Almost everybody talking about commodity now. Further we can see more volatility now.
We are in the last stage of commodity bull market. Therefore what should we do now? We must take advantage of present prices and we must try to sell whenever there is a rally. When everybody tries to sell market will crash. Some investors are planning to short market now. We must remember some points everybody wants to sell to make money. When others sell in market crash we must buy and we must sell when everybody is chasing commodity. As media highlight there is a no shortage as such at the moment. Speculation has gone to the roof. So we must be very careful in investing commodity now.
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ArtfulDodger
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133 Comments
May 18 04:42 PMThank you for your retort to my post.
I agree wholly with Jimmy Rogers' view that we are in a long-term commodity bull market. That bull could run for another ten to fifteen years.
I also believe that we've been in a capital investment boom since August 1982; but look what's happened over that time. Indeed, stock prices have increased greatly; but look how many short-term dips long-term lulls there have been. Some have been so bad that much of the public totally deserted stock investing.
The commodity bull will have the same up- and down-swings, and with commodities the down turns can be brutally severe—and quick.
Also, if you've been around as long as I have and you had paid attention to the big brokerage houses when they come on late in a big price run (piling on, as it were) promoting the run up (of anything, not just commodities), you would know that the end of the current run is drawing nigh.
Moreover, if you'll look back to the 90s, this same energy consumption promotion occurred then, and the bust out came and lasted for years.
Yank, this always happens with oil stocks. Indeed, as I noted, the irrationality can last much longer than most reasoning souls can imagine; but at the end of a big run when everyone piles on and decides to go along with the pump boosters, it's very close to being over—but not forever, at least not this time.
And this may be where I haven't made myself clear. I don't by any means believe that the commodity boom is over; but it's soon going to get whacked, and it will crash from where the prices are now (or thereabouts within a short range).
Charles Babbage invented the first computer during the amazing inventive years of 1815-1830. Thus began the "Age of Technology," which we're still in today.
But look at the ups and downs since then. When the tech bubble burst in 2000, I had already sold out of all my techs, but I still believed in tech as the investing path to the future; tech to this day holds excellent investment opportunities. But it went through hell and half of New Jersey before it got back on its feet.
If we've learned anything from our ancestors about investing that we should sear into our minds, it's Joseph Schumpeter's adage, "The bigger the boom, the bigger the bust."
And this definitely goes for this latest hard and fast run in oil prices.
My risk reward ratios show that there is no more than a 15% upward potential, while there is a minimum of a 30% downward potential.
I don't take my numbers lightly, and I'll stand by them, as I have with my investments.
I have exited all oil and commodity stocks, except for Ensco International (ESV), Global Industries (GLBL), Agria Corp. (GRO), and Tech Cominco Ltd. (TCK), and I have moved where the prices are better and there is more potential upside.
Stocks such as ADI, AIB, CF, CSCO, CX, ESEA, GIGM, GLW, GRMN, KHD, LRCX, LYG, MSFT, NAT, NOK, NTE, NTES, NVDA, TSM, & TXN.
Some of these have already run up further than the commodity and energy stocks and the commodities themselves since I've bought them, and they have a lot of upward potential to go, while carrying a very small downside potential, especially when you compare them to energy and commodities. (The exception to that would be CF Industries (CF) which has run from the 90s to about 140 since I bought it.)
I do think that companies such as Tech Cominco Ltd. which has kept excellent margins, is diversified across the energy/commodity board, and thus is worth holding onto through the upcoming storm.
Of course, when the upcoming downturn comes, TCK will get hit too.
So, go ahead if you like, Yank, and hold on to your energy and commodity investments, but hold on tighter to your purse strings when they come bombing down in the near future.
Rebeldog
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Paul Killinger
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1015 Comments
May 18 06:21 PM-
william
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16 Comments
My Website
May 18 08:16 PMWe need lower taxes on Oil for growth, we need to drill in anwr, we need to drill off both coasts, build new refineries, allow Nuclear Power plant construction, develop additional alternative energy sources, conserve and develop clean coal, tar sand and shale. We have been talking about energy independence from when that moron carter was in office- we still have plenty of talk and only action we have in ban on drilling because it might bother a squirrel or two in the woods! We deserve our problem because we created it!
A couple of oil stocks we like--kaz and abg.to -both produce and develop reserves in Kazahkstan.
In Russia we like sbe.l and iec.l and uen.l
Buying oil stock sure helps with gas at $4.00/gallon
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muley101
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187 Comments
May 18 11:26 PM-
Jake2
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249 Comments
My Website
May 19 12:19 AM-
user 191485
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6 Comments
May 19 01:24 AM-
NOWHEREMAN
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1500 Comments
May 19 02:00 AMJapanese and Chinese military escorts accompany drilling rigs in the China Sea.
Believe me, Guns and Ammo are pretty safe investments. The Oil wars are percolating.
Back in the 70's, both gold and oil moved up about or from $35 to $850 and $3 to $40. We are nowhere close to those levels yet and there were 2 1/2 billion less people vying for these products.
Rebeldog, while I totally agree that Tech is a very good place to invest, I only agree on the Broadband/video graphics aspect. Anyone see Total Recall with the Gubernator? I expect people to travel less physically in the future.
But nothing really matters since the world will end on 12-21-2012. The Crystal Skulls Profesy looms.
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ArtfulDodger
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133 Comments
May 19 02:44 PMRefilling Oil Wells
rense.com/general63/re...
Sustainable Oil
wnd.com/news/article.a...
The above two articles tie in well with Gold's "The Deep Hot Biosphere: The Myth of Fossil Fuels."
Rebeldog
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momomiester
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21 Comments
My Website
May 19 10:27 PM-
legmaker
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85 Comments
My Website
May 20 06:44 PM-
yugmnivek
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2 Comments
May 21 12:12 PM-
yugmnivek
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2 Comments
May 21 12:12 PM-
lntwo
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13 Comments
May 25 04:30 PMWhat is the hypothesized per barrel breakeven cost on these enterprises?
From your links it seems that the refilling is deemed rare, and while exploitable at some small scale doesn't offer a meaningful alternative. Are the early wells in Pennsylvania and California full, or refilling?
Also long term 20+yrs isn't CO2 is the dominant isssue?
thnks for any info you have on this.