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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.

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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 | Comments (38) | TrackBack (1)
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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.

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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