Crude oil went below $60 a few minutes ago. This chart has a couple of interesting things on it.The decline that started in July has been remarkably swift and unrelenting.
Here is an interesting notion. It is reasonable to think the Katrina created some sort of excess when oil first hit $70 a year ago August. The market then created its own excess this year fearing that the hurricane season would again be a bad one.
Following this line of thought anything above $70, which has been technically significant several times, is for now too high. On the support site, perhaps the level around $57.50 will be a low.
I was never on board with the $100 crowd. For months I had said I did not think oil would spend a lot of time below $60 (so far so good) but recently I nudged that thought up to $65 (oops).
Oil appears to me to be very oversold but of course there is nothing that says it can't stay oversold or even get more oversold.
I am hardpressed to try to predict the next few dollars over the next couple of months but there is a seasonal aspect to this decline and the big macro supply and demand issues have not changed because of this price decline. It has been a bumpy ride but it could get bumpier before doing anything else.
16 comments:
Last summer while all the pundits were calling for $100 and even $200 oil, I read a public Exxon Mobil corporate report which calmly forecast that they expect the price of crude to average $45 next year. Even then, they were saying that supply was more than adequate, and that they expected demand to diminish with the softening economy, and that they expected the "terrorism premium" to evaporate. If I had taken their forecast seriously I could have made a bundle. I'm sure they did!
Retroflake
I kinda agree with Anonymous above. My understanding is that there was a lot of terror premium (which may not have really changed); there was also an expectation that the Far East demand was high - but if the US economy is softening, and we import a lot from China, won't that soften the demand for oil too? - at least some?
I have also read (wish I could find a link) that the oil stocks are overflowing - almost litterally. I think it was November that they expected to run out of space as people have been taking physical delivery of futures contracts and just storing it (thinking it could only go up). [Who knew oil would be the new tulip.]
If this is all so, doesn't that mean it may go even lower before it comes back to a "reasonable" (ie, demand=supply) price?
I should clarify - the terror premium has indeed apparently dropped, although I cannot imagine the actual risk is different. Does anyone think there are not still people who want to blow up Saudi facilities? Maybe everyone has decided there will not be a shooting war with Iran in the Gulf.
There is also an investment premium caused by pension funds, hedgies, etc. holding gas/oil as an investment in commodities through futures contracts.
Fred
The following article at Bloomberg http://tinyurl.com/q8nmw (link courtesy of Kirk Report) indicates at least some analysts aren't buying the oil glut thesis.
Part of the problem is there are a lot of moving parts to the oil story specifically and the energy story generally w/ elements that clearly require specialized knowledge. I've never found an investing source that appeared to understand the entire equation so I just tend to focus on the value aspect: Companies that can make a profit at $25-30 crude are not going to suffer w/ crude at $50-60.
I pretty much follow the same logic w/ metals stocks but, with the exception of precious metals, tend to pay more attention to the current state of the market cycle there. Since energy stocks tend to hold up better than most in bear markets I continue to hold despite my pessimism regarding overall US equity market prospects 4Q'06 - 1Q'07 (consumer staples, health care, utilities and telecom services tend to hold up fairly well too).
Even though seasonality and election cycle are favorable we do appear to be at the end of the current business cycle and that plus secular and macroeconomic trends I follow persuade me that a market neutral (defensive) stance continues to make more sense from a risk/reward basis for now, at least from my perspective. FWIW
there was a political motivation behind the $45 comments as well as another motivation by the $100 crowd.
To RW's point; there are short term supply issues and long term issues. If we in fact have immediate storage capacity issues right now this is a negative for prices right now and good for consumers.
If the long term supply issue holds water it will take a while to play out. You either believe China and India with there billion people populations will start to consumer more oil or you don't. If you do you need to be prepared that it could take several years to play out.
Thank goodness for the 6-month waiting list for a Toyota Prius! Folks can now cancel and go get a Hummer! WOOT! Just overplaying what the crowd mentality will be if oil prices drop. We'll be back to the same problem we've had the past 30 years of not taking our energy needs seriously...
Regarding oil as a trade, I'd hate to guess where the bounce will be. I think we all know it's coming and that maybe oil will be in a higher trading range than in the 90's. But where oh where...
Why.......why it's as plain as the noses on our faces. Simple as that. How high can that cat bounce? We KNOW it's going to bounce HIGH.....right?
I mean EVERYBODY thinks so. Oil is going through the roof. We'll all be walking soon.
I'll go ahead and say it one more time. If it's that obvious.........it ain't going to happen. Roger is right. Maintain the proper exposure. Balance. Composure.
Take a breath. A step back. Read Roger's blog.
thanks George!
Good time to buy into oil stocks. Canadian oil stocks (e.g. Suncor, SU on NYSE and Toronto exchange; and Petro Canada: PCZ on NYSE) are good buys these days. Plus, if Americans buy the stocks traded on the Toronto Stock Exchange, they may get a bump from the foreign exchange difference if they hold for the long term because the US dollar keeps slipping against the Canadian dollar.
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Peter Chin
(Freelance blogging on Moneyfingers Blog: Adventures in Personal Finance and Investments)
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For another reason that oil is lower check out this article:
http://c1.zedo.com/jsc/c1/ff2.html?n=162;c=408/1;s=285;d=16;w=720;h=300;t=UndertoneNetworks.com The article states that the amount of oil that the US Government buys is small compared with the daily usage, but having an extra supply of crude down there by all those refineries that are no longer broken can't hurt i.e. normal market forces can start to work again. Tom in Indy
There is also the "Bush (Brother of Saud) Premium" which many believe has know been turned negative due to the Nov re-election.
Ask me after Nov. and I'll give you the proof.
There is also the rumor the multiple commodities hedge funds have gone bankrupt as they did not account for the "Bush Premium" turning negative and so are liquidating hence crushing oil and commodities.
Iceland? Thank you for the tip, I've always wanted to visit now I have a reason.
I'm not surprised by the drop in oil prices and wouldn't be surprised if it dropped below $58 tomorrow.
I actually posted the following on your Sept 27 thread:
"Actually "fair value" of crude is less than $45, imho.
Keep in mind, Exxon can be profitable at $30 crude, so anything above that drops to the bottom line. National oil companies extract oil for less than $10 per barrel (everything above that is pure profit)
Also, based on today's inventory numbers we're adding 1 million barrels (42 million gallons) of refined gasolines to the already massive inventory levels EVERY DAY. Can you visualize that? Each day, 42 million gallons refined over current demand. Hmm. At this rate, we'll run out of storage capaciy soon.
But, why not try to bid up the price yet again so we can send OPEC governments more of our money for crude we don't seem to be able to consume."
http://randomroger.blogspot.com/2006/09/quiet-energy-comeback.html#comments
Because Bush's approval rating is in inverse correlation to the price of gasoline, it's a challenge to keep your politics out of this. I'm looking in your direction Kudlow. My politics tells me wait until after the elections then oil will mysteriously start going up again. I'm thinking I might pick up SU or CNQ. But not until after the election!
By November the seasonsals will be more in oil's favor and the remaining hedge funds out there blowing up will have blown up.
OK the politcal stuff is just plain dark but it cannot be ruled out either.
soccer_f1 has been correct directionally so kudos but it seems very unlikely that OPEC will let $45 happen? IMO anyway.
Few OPEC countries can afford to cut production, especially with falling prices
Huge inventory build today
Oil trading at $57.84 right now.
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