Tuesday, April 25, 2006

Oil Bet Update

We are inclined to stay clear of the oil market for a while.

Crude oil has become one very hot commodity - enticingly hot.
U.S. crude oil inventories are a hefty 11% above the five-year average for this time of year. Natural gas inventories are also ample. Nevertheless, the price of crude continues to soar and the bullish speculators continue to pile into the market.

According to the CFTC's Commitment of Traders report, the so-called "large speculators" hold a record-high long position in crude oil.
The commercial traders hold a record-high net short position in crude oil.

As we have noted in several prior columns, the "Commercials" are considered "the smart money," based on their tendency to position themselves correctly at important inflexion points. The Commercials' massive short position, therefore, bodes ill for the price of crude, and for all those speculators who are betting on it to go higher still.

The Marketvane survey of commodity futures advisors validates the bearish implications of the Commitment of Traders report. According to the Marketvane, 76% of futures advisors are bullish on crude oil. This extreme reading is very close to the two-year high reading of 84%, and raises the likelihood that the overly popular crude oil market will become somewhat less popular very soon. All of these warning signs inspire us to turn our back on this red-hot commodity - and we'd suggest that you do the same for a short while.

~ Eric J. Fry


"Turn your back" to going long, at least.

8 Comments:

Blogger Bret said...

the "Commercials" are considered "the smart money,"

That usually gets a chuckle out of me. Have you ever wondered how the 'so-called "large speculators"' manage to stay in business if they are the not-so-smart money? They might be dumb, but on average, they tend to make a pretty good profit.

The speculators provide an insurance function and liquidity and are rewarded with profit. The commercials offset risk and pay (on average) for the privilege of doing so.

Both sides are plenty smart, and the market settles at the best predicted price for the expiration date. Of course, because the predicted prices through the end of the year are in the mid $70s and the volatility isn't all that high relative to the price, Oroborous has a significant advantage in this bet right now. Duck needs a big unexpected event to win. Always possible, so it's still exciting.

April 26, 2006 7:32 AM  
Blogger Duck said...

I'm long $100 oil for the price of a book.

Yes, the unexpected. Expect it.

I'll take some satisfaction, in the event that I lose the bet, in correctly predicting the direction of the market, which has been up. When I won my bet with Orrin Judd in 2004 that oil would top $50, everyone was saying oil was going back down below $40 on its way to $25.

$100 oil might not come this year, but we will get there in the not-too-distant future.

April 26, 2006 9:07 AM  
Blogger Harry Eagar said...

Lowest gas price in my county today is $3.53 and I still haven't had one call of complaint.

$75 is the new $40.

April 26, 2006 3:57 PM  
Blogger Oroborous said...

Well, "the Commercials" have the same opinion about the probable direction of oil prices that I do, so I'm inclined to agree that they're smart. ;-)

The thing about $ 100 oil is this. While it's a sure thing that at some point or another we'll see temporary price spikes of $ 100 or more, we can make crude for less than $ 100/bbl.
Thus, it's hard to see how we could have sustained price levels above $ 100. Even if we never pumped another drop of naturally deposited crude oil, we could satisfy the world demand for petroleum at $ 100/bbl within ten years.

Plus, at $ 100/bbl, we'd see enormous substitution of cellulose ethanol and biodiesel for petroleum, for transportation.
Even at $ 50/bbl, we'll see some of that.

Price fluctuations aside, I really think that we're near the ceiling of energy costs. At current oil prices, and with natural gas prices sure to rise somewhat over the next few decades, alternative energy production is quite profitable.
Alt energy can soak up the additional demand for energy from a growing world economy for decades, perhaps centuries, to come.

But of course, that's the view from 30,000 feet.
At ground level, it's quite possible to be badly hurt in the short term by scarce energy, even as the long term trends are in the other direction.

April 26, 2006 4:47 PM  
Blogger Peter Burnet said...

$100 oil might not come this year, but we will get there in the not-too-distant future.

As the post below discusses, everyone has their apocalyptic scenario. For the religious, it's the Rapture. For the secular left, it's destruction by global warming. For Duck, it's $100 oil.

April 27, 2006 6:00 AM  
Blogger Duck said...

Peter,
$100 oil is only the first precursor, or "Messenger", in my vision. It gets complicated from there, but when Adam Sandler, or "The Monkey-Faced Moron", wins an Oscar, then you will know that the Downfall is in full gear.

April 27, 2006 6:57 AM  
Blogger Harry Eagar said...

We're still quite a ways from alternative sources competing with oil.

I have been vastly amused the past few months, because oil users are accepting $3.50 gas without a peep, while the greens keep bombarding me with 'look at Brazil,they're gettng off oil [not strictly true] and going to ethanal.'

They don't mention that Brazilians pay nearly $6/gal for motor fuel.

April 27, 2006 11:24 AM  
Blogger Hey Skipper said...

Harry:

Dammit man! Stop clouding the issue with facts!

April 27, 2006 2:30 PM  

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