"ALL CAPS IN DEFENSE OF LIBERTY IS NO VICE."

Friday, June 27, 2008

OIL BUBBLE INSANITY CONTINUES: OIL TRADES ABOVE $140

Crude Oil
$139.64 a barrel
2:29 PM ET 06/26/2008
In three months oil has gone up nearly 50%.

IT'S NOW TRADING ABOVE $140.

This is INSANE.

A BUBBLE.

Especially since bad macroeconomic news should be driving the price DOWN, not up: RECESSIONS WEAKEN DEMAND FOR ENERGY.

Even a weak dollar can't explain it all, as a weak dollar improves exports and can increase economic activity.

The only possible rational explanation is that market movers think an attack on Iran is imminent and that Iran's retaliations will cripple Gulf Oil.

Or that hedge-fund trading formulas have a skewed premise - that tells them to buy oil when the dollars weakens as if oil was a safe hedge.

It is not: if the USA goes into recession, then the world does - and global oil demands declines.

REPEAT: oil should NOT be above $100, and probably should be about $70.

Oil began it's recent SURGE at the same time the US began it's SURGE into Iraq - which has been overwhelmingly successful.

It has gone UP UP UP ... FAST FAST FAST.

It must come down as fast, too.

Or faster.

It will, too.

Sooner than you think.

UPDATE: I HAVE POSTED THIS CHART BEFORE. IT SHOWS HOW OIL PRICES ARE HISTORICALLY SKEWED:

BRACE YOURSELF:

We’ve compared the spike in oil and other commodities like gold with the decline in the dollar since the fall of last year, and, up until recently, there was an outstanding correlation — going long oil, gold or other commodities was pretty clearly an effective way to short the dollar in an almost risk free environment. Something has changed, however, in recent days.

Since early April, gold and oil have moved in opposite directions. [GOLD IS THE RED LINE.] Gold’s price, in our view, has retreated as the market has judged, correctly, that the dollar’s decline is nearing an end for multiple sound reasons (a halt to interest rate cuts, global slow growth or recession, etc.). Meanwhile, oil’s price has become completely untethered from reality in an insane speculative frenzy, even versus other commodities (which have had their own bull markets).

It’s over, or at least coming to an end, in our opinion.
AND NOTE THAT THE DOLLAR IS NOT DROPPING AS FAST AS OIL IS SURGING - (SO CURRENCY ISSUES ARE NOT DRIVING THE OIL BUBBLE); HERE'S A DOLLAR-EURO CHART:

Chart

FROM MARCH TO MAY - AS OIL WENT UP 50%, THE DOLLAR WAS RELATIVELY STABLE ---- CHEAP, BUT STABLE.

SO I ARGUE IT'S A SPECULATIVELY FUELED BUBBLE.

AND IT WILL CRASH.

YES CRASH. THINGS GO DOWN MORE EASILY THAN UP. HERE'S WHY:
  • TO GO FROM 100/BARREL TO 150/BARREL IS A 50% MOVE UP.
  • BUT FROM 150/BARREL TO 100/BARREL IS ONLY A 30% DOWNWARD MOVE.
  • 30% IS AN EASIER/QUICKER MOVE FOR A MARKET TO MAKE THAN 50%.
SO... IT WILL CRASH SOONER THAN YOU THINK.

5 comments:

northern seer said...

If you are so convinced this is a bubble then you should buy some short options...

The real value of oil, when the weak dollar is factored in has not moved very much...in fact the fall in the dollar against the euro has hurt North Sea producers, who have reduced output!

The price of oil will come down if and the FRB raises interest rates and the dollar gains strength - not before.

northern seer said...

America’s Problem
http://americanaffairs.suite101.com/article.cfm/weak_dollars_affect_on_oil_prices

The data shows that as oil prices go up (versus the dollar) the price of gold also increases and the dollar drops (relative to other currencies.) In Ben Steverman’s September 2007 Business Week article, he quotes Paul Larson, equities strategist at Morningstar as saying: "It's no coincidence that the U.S. dollar is hitting new lows just as oil prices hit new highs.”

But as oil increases in dollars, nations receive more dollars for their currency. Crude oil prices have increased 7% from 1980 to 2008 (in today’s dollars) while the Yen has increased 17%, the GBP 29% and the € 63%**. This implies the real oil price increases are greatest in the USA.

* Organization of the Petroleum Exporting Countries

** The Euro started in 1999.

northern seer said...

see this chart:
http://bp2.blogger.com/_sy2qqBjcPIg/SD2H1_xQX2I/AAAAAAAAAhA/CCwExkEzOvM/s1600-h/WTIC_Oil_Prices_vs_USD_vs_SnP500.png

northern seer said...

I'll agree that gold and the dollar have not moved enough to offset the current oil price - but a lot of this is probably because of more specualtors piling on - so yeah - there could be a major correction...or a war?

Reliapundit said...

IT'S NOT JUST SPECULATORS.

HEDGE FUNDS AND PROGRAM TRADERS HAVE FORMULAS: WHEN STOCKS GO DOWN THEY AUTOMATICALLY BUY COMMODITIES AS A HEDGE.

THEY HAVE BEEN ON A TEAR BUYING OIL - WHICH HASD MOVED UP THE MOST - AND WHICH DRIVES DOWN THE STOCK MARKETS --

IT'S A VICIOUS CYCLE.

TO UNDO IT WE MUST DRILL MORE.