Oil is up over $6 today as I write this. The daily swings have become much bigger in the last week or two than what is normal. This may signify something meaningful.
Forgetting what you think of the supply and demand aspect of oil for a moment, bigger swings than normal after a huge run that draws out many predictions of much higher prices very soon would seem to cry out for a meaningful drop before doing anything else. This sort of pattern is pretty reliable like when gold went above $1000 for a couple of days.
I buy into the long term supply and demand issues, I have been writing about them for as long as I have been writing, but whatever the exact reality of demand growth versus supply is, it is difficult to argue that the YTD move in crude is justified by the fundamentals alone.
WTI could fall to $110 (not a prediction) and still be up a lot for the year.
If you want to talk about long term supply and demand I am right there with you but such relatively violent moves should not be ignored as a short term tell.
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I'm calling this as a sign of the top in oil:
http://www.nypost.com/seven/06112008/business/chrysler_bldg__on_the_block_115016.htm
Not being a chartist of any sort, I have to look for a meaning somewhere in all of this, so here is my two cents, without referring to tops, double bottoms, resistance, channels et. al.
OPEC accounts for 40 percent of the world’s oil supply, and is eager to avoid repeating the mistake of 1997, when the cartel increased output just as the Asian financial crisis was brewing. A result of that mistimed decision was that prices collapsed to about $10 a barrel, rattling the oil producers, and allowing the Saudis to regain control of OPEC strategy.
As a disciplined Saudi led cartel, OPEC has the means and desire to maximize price. Non-OPEC producers are marginalized at present, and OPEC would like to keep it that way.
When Bush asked the Saudis for more supply, and they said no, my guess that they told him to shore up the dollar first. (Hence the jawboning by the Fed and Treasury, no more cuts, possible rate increase etc.)
Now the Saudis are going to have a summit type meeting with the buyers and sellers represented. I think they will offer temporary increased production from time to time to offset the sudden spikes that have occurred and caused riots by truck drivers and fishermen.
In return, they are going to ask for agreements not to randomly create new supplies (i.e. Alaska, North Sea, Caspian Sea etc.) as in the past that have caused wide cyclical market prices.
I don’t know what all this means to the current speculation, it might be simply the expectation of sustained higher prices as a result. That is the way I’m leaning.
OG
check out FXI from Oct 17th 2007 till the end of the month.
Everybody was thinking China is unstoppable, just like they think of oil. It gapped up on high volume, just like oil did, gaining $10 that day...
If then had couple of weeks of extra volatile trading before it puked.
I bought puts on USO on Monday, first time I bet on the downside in USO.
June 9, 2008
(Reuters)—Fund manager BlackRock expects the global credit crisis to last another two to four years as a weakening U.S. economy triggers more write-downs by banks, its chief investment officer for equities said on Monday.
The prediction was one of the starkest so far by a global investor about the length of a crisis that began last year with the collapse of the U.S. subprime mortgage market, roiling financial markets.
The turmoil has led the $1.4 trillion money manager to be underweight on financial shares.
“The credit crisis will be with us for a long time,” said Bob Doll, also vice chairman of BlackRock.
Roger,
I totally agree with you. The IEA came out today and called it a crisis and the futures exchange increased margins on outstanding positions. These are all signs (to me at least) that "They" are concerned and starting to address the high cost of crude.
The 'Credit Crisis' will probably last 2 to 4 years, and will no doubt and in hindsight look like a credit contraction. Surely that is what it is, a natural part of the cycle where money can be made but just not as easily as it has been in the last 5 years.
This time is different because of higher commodity prices and a growing Asia, Russia and S America. Maybe the contraction will be very shallow if you take into account Global growth?
Roger, what do you do during this part of the cycle? Although it's certainly not the first I've experienced (at school I was probably the only kid who read the financial's daily) it is the first where I've been exposed as an investor.
I think I might have answered my question in the second paragraph but is there a traditional haven during this phase?
i have outlined my position for a while; generally defensive, less than normal equity exposure, overweight materials, tilting to non dollar assets (like foreign stocks and debt) and more cash than normal.
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