What's Next for Crude Oil ?
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"The commodity looks like it has legs, which is trader talk for its going higher. While I do not make a habit of forecasting commodity prices, $110, and then $125 are our next two targets.I got your core inflation right here . . ."
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That was our March 3rd quote on energy prices.
As Bloomberg reported this morning, Crude was $125; As I write this, CNBC is flashing that Crude is over $126 a barrel.
We have been Bullish on Oil and energy stocks for a long time. Our first recommendation of Crude Oil was back in 2003, when the price broke out over $32 per barrel. I picked Energy as my favorite sector for the Business Week forecasts for 2004 -- something that more than a few people ridiculed at the time.
In 2004, we observed our target of Oil = $50 a Barrel was hit. I also explained why at $40-50 there was no “terror” premium (comments picked up by WSJ, Barrons, and Slate).
Early on, we recognized that it was Chinese Oil Demand underlying the increase in cost. We also looked at why Refining Capacity was a problem. We have examined Global Crude Oil Demand & Gasoline, we looked at Oil: Inflation adjusted.
We looked at whether Oil Jitters Gotten Overblown?. That answer was no. We also looked at the question: Do Higher Oil Prices Lead to Recessions? Turns out the answer is yes. Large Hedge Funds who had been ignoring our bullish energy advice did so at their own peril.
So where does that leave us in 2008?
Well, we have political considerations with the US presidential elections, upcoming Summer Olympics in China, an ongoing war or 3 in the Middle East, and of course, a weak dollar (which is now in a counter-trend rally).
Let me offer one last way to think about Energy: Its relative strength versus precious metals.
As the dollar has strengthened, precious metals have gone south. Yet Crude oil has continued upwards, implying that this is more than a mere currency story.
Dennis Gartman writes:
"All things being equal, if one were to hear that crude would be $2/barrel higher and then were asked how much stronger gold would be, one would answer, swiftly and with confidence, "Oh, at least $5-$10/ounce." Wrong!! Gold's down $6/oz, sending the gold/crude ratio to new lows for the past several years. At the current levels, it now takes 7.06 barrels of crude to "buy" one ounce of gold. 15;1 is rather more "normal."
Have a look at this ratio in a 3 year chart:
graph via Stockcharts
I'll see if I can find produce a longer term chart of the ratio above -- it might be revealing.
~~~
Its funny, but I got a lot of grief over an $86 forecast several years ago -- but $125 was pretty easily accepted. That implies a major change in psychology is taking place.
More on this in the coming weeks . . .
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Sources:
The Gartman Letter
Dennis Gartman,
Thursday, May 8, 2008
http://thegartmanletter.com/
Crude Oil Rises to Record Near $125 a Barrel on Supply Concern
Grant Smith and Christian Schmollinger
Bloomberg, May 9, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=auqhuZnpEFFE&
Friday, May 09, 2008 | 06:39 AM | Permalink
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» BizLinks and Open Comments | 5.9.08 from Loren Steffy
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Tracked on May 9, 2008 9:40:49 AM
Comments
Barry, I've noticed that when you get really excited about things, and start posting about them in almost real time, they usually go the other way.
Most recently I remember in March when you said something like "if we finish down today then it will be time to pile on the shorts." The market promptyly rallied.
~~~
BR: I have been posting about Oil in real time for 5 years. If you bet against that call, you lost money.
As to the March comment, I am not sure what you mean. I posed an If/Then statement. The "If" did not happen -- so the "Then" portion does not apply.
i.e., If a rains today, I will take an umbrella. (No rain, no umbrella)
Posted by: Owner Earnings | May 9, 2008 7:49:41 AM
So what's next?
Posted by: Vermont Trader | May 9, 2008 7:53:22 AM
For those who follow my random musings, this one can maybe make you money. Oil is likely to hit a number soon that will cause a non-linear equity market event. Look closely at the volume on QQQQ for confirmation. During the entire bounce off the March lows, an astounding 35 trading days, QQQQ volume only once beat its 100 day MA and barely that one time. It looks like the market is now euphoric and starting to roll-over. If this is accompanied by the volume pickup I expect, watch out below for stocks.
Posted by: Steve Barry | May 9, 2008 8:07:33 AM
One of the talking heads from the oil industry was on Bloomberg yesterday mentioned that the spare capacity in the world amounts to around 2% so any slowdown affects the price.
Once you consider the attacks in Nigeria, the cross border raids by the Turkish into Northern Iraq, the strikes in the North sea and the approaching Hurricane season in the Gulf it isn't hard to see that a small drop in production can easily squeeze the total supply in the world market.
Of course, that is ignoring refining capacity which is also stretched and finally declining production in Saudi Arabia, Russia, North Sea, Mexico etc.
Oh, and the oft used arguement about the current high level of the SPR is pretty poor - the drop in demand in the US that has led to an increase in the SPR is more than compensated by the increase in demand from China/India so global net oil demand is still increasing.
The weirdest thing to understand is how there are so many people who don't understand the fundamentals of the oil price increase and blame it solely on speculation. The majority could find hundreds of reasons why the house price boom would continue on forever a few years back, but can't seem to fathom the current commodity price boom.
Finally, if anyone really wants to deny that oil prices will remain high then answer this question. Is it really in the interest for any of the OPEC countries to sell oil for less? In some cases oil is the only industry they have and given it is a finite industry they will want to get the highest possible return. So far, the importers have complained about the oil price, but haven't yet cut their demand significantly. Until they do, why should the exporters ask for less for their finite product?
Posted by: Peter | May 9, 2008 8:10:57 AM
The Gold-Oil ratio seems to lend credence to GATA's claims of recent gold market intervention by central banks.
Posted by: gallatin | May 9, 2008 8:12:40 AM
For those who sid there were no 30 Million dollar apartments in NYC, here are 10 from $36-75M
Posted by: Steve Barry | May 9, 2008 8:19:18 AM
http://images.businessweek.com/ss/08/04/0425_manhattan_mansions/source/2.htm?campaign_id=aol
Posted by: Steve Barry | May 9, 2008 8:21:18 AM
As a side note, I wonder if the prospect of consumers "coming into some money" - getting a few extra coins in their pocket from rebate checks - is a bullish indicator for oil - spurring on the eager traders. Does that mean the recent oil cost increases will totally consume the rebate bonanza? Will every cent the US gov't pumps into the economy from this point on be consumed in burning fuel? Isn't it obvious Oil price more or less feeds on liquidity, so is there really any surprise here?
Posted by: William | May 9, 2008 8:21:45 AM
I think this one must be hitting Barry in the back pocket or something. Maybe he doesn't think he is keeping up with the price of gas? In other words, he has no inflation expectations, only the expectation that his life is getting rearranged.
It is.
Posted by: wally | May 9, 2008 8:35:18 AM
What will be extremely funny is when crude backs off 15% from where ever it peaks and the pundits proclaim 'whew, we knew it was a bubble. The consumer is going to be so relieved'. Goldilocks LIVES!
Posted by: Ross | May 9, 2008 8:40:25 AM
Oil is NOT $125-plus a barrel.
That price includes shipping, handling storage, brokerage fees, profits for the drillers, profits for the national oil agency at the country of origin.
If you strip those out, the core price of oil is actually much, much less.
~~~
BR: I really do not get your point.
Its in the name: Crude Oil for future delivery. All those extras have always been part of the price, back when Oil was $10, or when its $150.
Perhaps you would prefer we start reporting "Core" oil prices . . . ?
Posted by: VennData | May 9, 2008 8:42:06 AM
What is going to happen when Congress passes the bill (now being considered) that will essentially eliminate electronic trading of oil?
Posted by: Andrew | May 9, 2008 8:43:44 AM
Your chart made me chart some other commodities against gold. This one is pretty weird:
http://stockcharts.com/h-sc/ui?s=$DJAGR:$GOLD&p=D&b=1&g=0&id=p29628494279
What do you make of it?
Posted by: Keke | May 9, 2008 8:44:31 AM
Gold is a messenger, can't control the illness, shoot the messenger. via London gold pool. Gartman is right about one thing though. Compared to oil bullion is cheap, bullion stocks are cheaper. Peak oil means higher oil, means higher bullion.
Posted by: stuart | May 9, 2008 8:46:06 AM
Sorry, but I don't buy the theory that supply and demand for the commodity is supporting the price of oil. I suspect at least 30% is due to speculators passing paper back and forth in an unholy alliance that nobody except the consumer wants to spoil. It will take an exogenous event to pop the bubble. Without one, the feedback loop will raise prices to $150 within a couple of months.
Look at the price of copper. It is dipping and might be at an inflection point. If it continues to drop, it will spoil the theory proffered by useful idiots and thieves that oil price increases of several percent a month are appropriate. Dropping copper is also a leading indicator for a stock market fall, providing it is accompanied by a strengthening yen. The movement has been too little to make a firm prediction, but both have moved enough to maintain interest. Money also appears to be moving into the 10 year bond.
Right now, speculators and buyers are playing chicken with natural gas. Natural gas is typically stockpiled in the summer when prices are lower. Big money is playing the natural gas buyers by trying to force summer purchases at winter prices. Allowing speculators to win will bring in government regulators next year so that the price explosion can be investigated.
A WSJ story about the FTC investigating the commodity markets was good news. I suspect Obama will follow through on this. When speculator thieves steal from me, I expect them to be raped in reciprocal fashion using sharp edged foreign objects, with lots of vig taken off the top.
My guess is that the market will finally react to high commodity prices and low profits and even lower expectations by dropping to around the January lows within the next few weeks. This will be a buying opportunity, but will also be a quick turn event. The market will enthusiastically bubble up to a little higher than recent highs. Then, if commodity prices are still raping the rest of the world, the markets will fall to well below the March lows. This last fall might be the exogenous event that pops the bubble for a while.
Posted by: cinefoz | May 9, 2008 9:08:07 AM
Barry,
What is your perspective on gold?
Posted by: Ben | May 9, 2008 9:08:36 AM
BTW, I believe the proper term for oil and other commodity pricing at this time is a 'Minsky Event'. At this stage of the ponzi scheme, 'investors' depend on rising prices to pay for the loans taken out to make the 'investments' in the first place. When an exogenous event makes borrowing or price increases unlikely or impossible, the house of cards collapses. Didn't something like this just happen?
If there is enough capital available to support commodity speculation and price feedback loops, then I suspect it is OK for the Fed to start removing some of the credit supplied to prevent market lockups.
Posted by: cinefoz | May 9, 2008 9:23:25 AM
☻☻"What will be extremely funny is when crude backs off 15% from where ever it peaks and the pundits proclaim 'whew, we knew it was a bubble. The consumer is going to be so relieved'. Goldilocks LIVES!"
--Posted by: Ross | May 9, 2008 8:40:25 AM
"The laboratory worker's imagination may frame a hundred notions and by experiment settle on one. The lay imagination retains its hundred and utters them, letting them take their chance in the people's minds. The plausible, the picturesque are taken as truths, influence conduct, and generate fears."--Jacques Barzun, "From Dawn to Decadence"
Posted by: DownSouth | May 9, 2008 9:31:04 AM
Oil has very inelastic demand. It takes time to adjust habits and economic situations to account for price increases.
But adjustment will happen. Toyota just posted its worst results in North America in some time for placing a huge bet on huge Tundras (have you seen the size of these things?) that people are no longer buying in droves.
Once adjustment occurs--give it eighteen months at these prices--look out below. Oil could revisit its lows of the eighties, when it crashed from about $80/barrel at the beginning of the decade to $10 or so (nominal)by mid-decade.
Please w/ the "things are different this time" bullshit. Humans are ever and always the same, including the hubris that accompanies every age in its thinking that things are really different this time.
Tight money and increased efficiency (yielding reduced demand) destroyed oil prices in the eighties. Expect more of the same this time. It's just a matter of when, not if.
Posted by: DonKei | May 9, 2008 10:03:29 AM
How do the fundamentals support $126 oil??
_______________________________________
How did the fundamentals support the Nasdaq bubble? The housing bubble? You must consider the dollar in this case though. A dollar approaching zero supports oil approaching infinity.
Posted by: Steve Barry | May 9, 2008 10:08:44 AM
BR,
nice track record on those Oil calls, with those links, you continue to set the mark of excellence..
as an aside, seeing as GM isn't using it, and they could use the fundz, maybe you could pick up their TM: "the mark of excellence" and put it where it would, more, rightly rest..
Posted by: Mark E Hoffer | May 9, 2008 10:13:26 AM
>>>Please w/ the "things are different this time" bullshit. Humans are ever and always the same, including the hubris that accompanies every age in its thinking that things are really different this time.
Correction. Same hardware, different software.
in other words... people are insane, they just find new ways to be insane.
Sometimes things are different. Like every day. Especially when some dude became the "destroyer of worlds. Do you want sugar or cream in your coffee?
Posted by: steve | May 9, 2008 10:37:10 AM
Barry,
Good calls in oil but even a simple super model like me knew gold and oil were the next speculation bubble a few years ago. I think gold was 480 and oil 60ish? I never look at quiting ahead as quiting. Anyone claiming fundamentals is full of shit and has no way of proving that. Because there are none. Even the dollar weakness is bullshit as there is absolutely no relationhip here recently. I bet you could show a linear relationship to the rise in oil since,..oh,..the middle of March. Ah yes, the investment banks can borrow from the Fed. From 104 to 126 in six weeks. If you all want to ignore the elephants in the room, be my guest. Many did in both the last two bubbles and didn't get a chair when the music stopped.
Honestly, I love it. Good for our country long term. I can just see the oil barrons shitting their pants. Their biggest consumer has started to seriously take up alternatives and consumption is plummeting. Builders blamed the speculators and I suppose the oil industry will too.
Posted by: Ken H. | May 9, 2008 10:45:38 AM
"especially when some dude became the destroyer of worlds..."
Okay, I'll bite, what the hell does that mean?
Posted by: DonKei | May 9, 2008 10:46:19 AM
Good luck with thoses shorts:
From today's FT:
The rise in prices was even stronger in crude oil products, with diesel in Europe rising 2.7 per cent to $1,187 a tonne, a new record high. Demand for diesel is rising as developing countries, including China, South Africa and Chile, suffer power shortages and utilities rely more on diesel-fired power plants and generators.
The market is increasingly concerned about a “super-spike” in oil towards $200 a barrel, with the number of financial bets on crude oil prices hitting that level before the end of this year jumping almost 40 per cent since the start of May.
There were 21,002 outstanding contracts for Nymex December 2008 call options at $200 a barrel on Thursday, up 38 per cent since the end of April.
Holders of the options would make a profit if the oil price exceeds that level by the end of the year. Since the beginning of the year, the so-called “open interest” in these contracts has jumped fourfold. The number of outstanding contracts at $150 a barrel is also rising sharply.
John Lipsky, deputy managing director of the International Monetary Fund, said on Thursday that “inflation concerns have resurfaced after years of quiescence” due to soaring energy and food prices.
Mr Lipsky added that the factor underlying the price increase in energy and other commodities appeared to be “fundamental” in nature. “This means that much, if not most, of the recent price increases are likely to prove durable,” he said.
However, it added that low interest rates and the weakness of the US dollar had also contributed to the rise in oil prices. He said IMF research suggested that $25 a barrel of the current price of oil could be explained by the drop in the dollar.
Posted by: me | May 9, 2008 10:52:27 AM
