Oil Bubble?

[Jeff Matthews]

Hmmm? Comparing the price of oil to the stock bubble or housing bubble? I think you first have to see if that comparison makes any sense.

What war was ever fought over housing or stock prices?

What is the OPEC equivelent for housing and stocks?

What are the CONSUMPTION rates for houses and stocks?

What is the total global availability of houses and stocks?

If you ask me, this article is a bit like writing, "Gas mileage will go up in cars because people get good cardio exercise walking up stairs." HUH?

Most economic theory about pricing is useless anyway. If it was right, or if they knew anything about valid models, they'd be able to predict the movement of oil prices, and they can't. Anymore than they can predict the price of stocks. For example, science has a theory about gravity. That theory can be used to predict how fast a bowling ball will hit the ground when dropped from your roof. That is a real THEORY - it can make accurate predictions of real phenomena. Economic theory isn't really theory at all, it can't be used to predict anything. It is "wild guess" a totally different meaning than theory.

As has been pointed out numerous times, there really is no national market for "housing." Housing markets are like micro-climates - different everytime you move 5 miles. Has nothing at all to do with oil, which relies upon such forces as warfare, geopolitics, and nefarious behind the curtain activities.

Colin, I'm glad you resurrected this dinosaur. Well, Mark.... Was I right, or was I right? []

[Jeff Matthews]

It's no hidden structure. WYSIWYG. People bidding up prices they will pay because they can pass on the increase to the next guy. That's what business is all about. Nothing negative. Nothing positive. No evil. No charity.

If you think prices will go up next week, you'll pay a bit more today. If you paid a bit more today, that becomes the new price. An increase in supply or a reduction in demand are the only factors that will bring prices down. There is no conspiracy to dismantle.

Sorry, but I must bask in the glory of correctness.

And just to think. I made these statements back over a year ago, when everyone thought we were doomed and there was a big conspiracy.

[Jeff Matthews]

I was an Assistant Energy Trader and Office Manager at Merrill Lynch and Infinity Trading Group in the nineties. I personally made over 1,300% annual ROI shorting Japanese yen and oil down to $10 a barrel.

One of the first things Hugo Chavez did as the new leader of Venezuela was to go to Mexico and get them to agree to follow OPEC production guidelines, this stopped Venezuela and Mexico from being two of the biggest OPEC cheaters and it immediately firmed up the price of oil

Second, global oil production has not dramatically increased in the last year

Third, Iraq was pumping 2-million barrels per day under the UN Oil for Food program

Fourth, 10 years after the Gulf War to protect Saudi Arabia from Saddam Hussein, the program was soon to expire (only the U.S. wanted to keep it in place)

Fifth, the U.S. invasion of Iraq effectively stopped, and then reduced, Iraqi oil production, now about 1.5 million barrels per day

Sixth, Chinese and Indian demand is up almost 10% per year or more, for the last several years

Seventh, U.S. demand is much greater than both China and India combined

Eighth, U.S. demand dropped 2% recently as Americans finally cut back

Ninth, Russian oil is not flooding the market, Russia abides by OPEC production guidelines

11) At the current growth rate, Chinese import demand will catch up to U.S. next decade

12) The supply and demand picture has not changed fundamentally since last year when oil prices were ½ lower

13) High commodity prices will stall U.S., Chinese and Indian growth

14) The Chinese Yuan links to the USD; lower USD means the Chinese are also paying more for their oil and getting less value for their U.S. exports

15) High oil prices will bring new production - such as coal and Brazil, and new easy-to-burn fossil fuel supply, such as E85 gasoline with 15% ethanol - to market

http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/index.htm

16) High oil prices will bring new fuels to market

17) The history of nature, weather, crops, commodities, human activities and markets is one of boom and bust cycles

18) Demand will falter, production will increase, prices will fall; it always does

19) After a final blow-off spike higher, possibly much higher, look for a crash, in the next few months, possibly years, below $100 a WTI barrel!

20) Then prices may drop possibly as low as the 60s again in a few more years or the next decade

Mark, there are useful valuation theories for those markets. The Fed used a classic bond to stock yield ratio to explain that the Tech bubble was “irrational exuberance.” Media doesn’t explain such mathematical models to the sixth grade public.

A random walk is macro picture. All I care is my micro picture; not how well will 500 stocks do, but which one or two do I buy and hold now.

Actually, if economists did know anything about any of these topics - they wouldn't talk about it, they'd be buying and selling stocks. Then they would quiet or be traders or money managers, not economists.

CA electrical debacle was a classic example of government price controls: they don’t work in the long run!

Oil companies have more than enough leases to drill more oil. There is a shortage of offshore oil drilling platforms. The U.S. cannot drill enough to provide all its oil needs.

Okay, Colin. You missed 1-16, but you get full credit for getting 17-20 right. [Y]

[Colin]

thanks for the full credit, what is wrong about 1 -10 16 though?

[dBspl]

I thought many of your points were fairly accurate. US oil consumption in 2008 was off 6.4%. China and India were up a few percent despite a global recession.

World oil consumption was only down .6%. This is very surprising considering the US was off as much as it was, and we consumes 25% of the world oil consumption.

I'm sure 2009 consumption will be down even more. The US may even decline by another 10% compared to 2008. But despite all this, world oil consumption will probably remain flat. Crude prices are still relatively high, hovering around $70 a barrel. I suspect you're right that we'll test $50 oil this Fall, but I also have no doubt $100 plus barrel of oil will be right around the corner as soon as US consumption starts to return to normal.

I don't know if anyone has posted this already, but here's the link to BP World Energy Review. It one of the best resources I've found concerning energy. The pdf file is about 50 pages.

http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622

dbspl

[Colin]

The U.S. Energy Department will probably say that distillate fuel
inventories rose from 167.8 million barrels, their highest since 1983,
by 1.2 million barrels, according to a Bloomberg survey before the
department's report tomorrow.

http://www.chron.com/disp/story.mpl/hotstories/6630739.html

WTI Crude traded in a range of $29 to 33 in 1983 dollars. About $61.90 in current dollars.

[jacksonbart]

Jokes on the oil producing countries. I have been buying barrels of oil on the price dips and pouring it into my property to restore the oil content. When gas prices are back above $120 a barrel, I will just drill it back out again.

[Colin]

silly, fill the pool and the basement, no drilling required!

[AltmanEars]

I was an Assistant Energy Trader and Office Manager at Merrill Lynch and Infinity Trading Group in the nineties. I personally made over 1,300% annual ROI shorting Japanese yen and oil down to $10 a barrel.

One of the first things Hugo Chavez did as the new leader of Venezuela was to go to Mexico and get them to agree to follow OPEC production guidelines, this stopped Venezuela and Mexico from being two of the biggest OPEC cheaters and it immediately firmed up the price of oil

Second, global oil production has not dramatically increased in the last year

Third, Iraq was pumping 2-million barrels per day under the UN Oil for Food program

Fourth, 10 years after the Gulf War to protect Saudi Arabia from Saddam Hussein, the program was soon to expire (only the U.S. wanted to keep it in place)

Fifth, the U.S. invasion of Iraq effectively stopped, and then reduced, Iraqi oil production, now about 1.5 million barrels per day

Sixth, Chinese and Indian demand is up almost 10% per year or more, for the last several years

Seventh, U.S. demand is much greater than both China and India combined

Eighth, U.S. demand dropped 2% recently as Americans finally cut back

Ninth, Russian oil is not flooding the market, Russia abides by OPEC production guidelines

11) At the current growth rate, Chinese import demand will catch up to U.S. next decade

12) The supply and demand picture has not changed fundamentally since last year when oil prices were ½ lower

13) High commodity prices will stall U.S., Chinese and Indian growth

14) The Chinese Yuan links to the USD; lower USD means the Chinese are also paying more for their oil and getting less value for their U.S. exports

15) High oil prices will bring new production - such as coal and Brazil, and new easy-to-burn fossil fuel supply, such as E85 gasoline with 15% ethanol - to market

http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/index.htm

16) High oil prices will bring new fuels to market

17) The history of nature, weather, crops, commodities, human activities and markets is one of boom and bust cycles

18) Demand will falter, production will increase, prices will fall; it always does

19) After a final blow-off spike higher, possibly much higher, look for a crash, in the next few months, possibly years, below $100 a WTI barrel!

20) Then prices may drop possibly as low as the 60s again in a few more years or the next decade

Mark, there are useful valuation theories for those markets. The Fed used a classic bond to stock yield ratio to explain that the Tech bubble was “irrational exuberance.” Media doesn’t explain such mathematical models to the sixth grade public.

A random walk is macro picture. All I care is my micro picture; not how well will 500 stocks do, but which one or two do I buy and hold now.

Actually, if economists did know anything about any of these topics - they wouldn't talk about it, they'd be buying and selling stocks. Then they would quiet or be traders or money managers, not economists.

CA electrical debacle was a classic example of government price controls: they don’t work in the long run!

Oil companies have more than enough leases to drill more oil. There is a shortage of offshore oil drilling platforms. The U.S. cannot drill enough to provide all its oil needs.

Okay, Colin. You missed 1-16, but you get full credit for getting 17-20 right.

I really love this type of quote...esp the part about making 1300% annually. Now for the rest of the story. People who consistently make money in these markets may have economic thoeries but price action is king --- mostly because of the amount of leverage we use... If you are relatively flexible in your approach you watch the oil market and trade the correlated currencies which tend to offer much greater liquidity, leverage and there are no real position limits. Our freind who was quoted merely was positioned so that he caught the massive yen move in October of 1998. Relatively small traders have positions of 20million + so if your average return is really 1,300%/year (more than 70%/month) you would be able to grow your $20 million into a conservative 2 X 10 to the 22 power in roughly 60 months...

So the real truth is as follows ---

"""I had a theory about the oil markets and, as you know, Japan's economy and currency is highly dependant upon oil prices. I set up a trade and I was lucky enough to catch the biggest move of all time and make more than 10X on that trade. In retrospect this was mostly luck since I've had tradeable ideas before and after and they surely haven't all worked out as well. I'm counting my blessings --- humbly yours "Joe Trader"..."""

I thought it very interesting that Mark ? was dead right on the value of fundamentals in the market. I have very good predictive software and you can prove most of the fundamentals have no predictive value -- such is the nature of markets. Furthermore, for every logical theory you have on oil prices I can find another logical theory on the other side of the argument. Its probably worth adding, the random walk theory is not actually the logical alternative. The random walk people failed to see that most markets are leptokurtic. All of you know this is true since you have lived through highly skewed markets with fat tails.

Sorry I had to rant ---

Because of my position and the nature of this thread I must add that nothing in this note should be considered advice. If you know the rant was true you probably were in Davos waiting in the long line to hear from one of the consultants we use and this is merely a very poor short review.

[Colin]

actually it was about 17-18 trades in Crude and Yen, never did replicate that annual rate of return again

[jacksonbart]

The year before didn't you loose 75%?

[Colin]

On the monthly charts, light sweet Texas Crude did test lows

below $30 at the beginning of the year. Although I hate to admit it, the story

of 2009 has been a steady firming of oil prices, with several double bottoms. Continuing

improvements in the global economic picture is likely to keep Crude on a steady

uptrend, probably for the next several months, possibly for the next several

years. Double bottoms at $60 and $70 project for a near-term test of the price gaps

in the monthly chart above $90 and $100 a barrel.

The realities however, are that even today’s tight supplies will

eventually catch up with tomorrow’s perceived demands. This is a classic case

of “buy the rumor, sell the fact.”

I think that when the news of the economic recovery is off

the front-pages (next year, after the mid-term elections?), prices above $60

per barrel will encourage more supply and new alternative energy sources to

bring the price of Crude back down. So it is with price squeezes. So it is with

commodities.

Happy Holidays! May you enjoy your family and friends.

[dBspl]

Assuming you're right that “stocks and crude are almost always lowest in December”; suggest we might be on a nice little run-up of oil prices next year.

As we do recover from this recession, increasing world oil demand (and decreasing production from mature fields) should be able to off-set any additional oil supply that comes on-line. As for alternativ energy...I guess we'll see.

dbspl

[johnyholiday]

http://www.oilprice.com/

[AltmanEars]

Crude tends to be lower in Dec. due to inventory adjustments. In addition there is the beginning of yen repatriation and the stronger seasonals of the YEN carry trade with the yen tending to be weaker in Dec.. Statistically the yen trade is more reliable than the Oil trade. As you guys might know there are no position limits in the YEN trade so for many of us OIL has become less relavent. But I love Colin's no nonsense approach to building a system...

As far as triple double bottom stuff --- its not that significant and I've gone to a non linear, non optimized quantitative approach which has worked well over the last decade. Nothing spectacular but it pays the bills and the partners are happy.

BTW over the next few days you will see a nice spike in the carry trade against a beat up currency... There are two that are interesting --- consider this a New Years present... (one is a synthetic) (obviously this is just for fun since if you know how to create a synthetic cross you dont need my help)

[AltmanEars]

Crude tends to be lower in Dec. due to inventory adjustments. In addition there is the beginning of yen repatriation and the stronger seasonals of the YEN carry trade with the yen tending to be weaker in Dec.. Statistically the yen trade is more reliable than the Oil trade. As you guys might know there are no position limits in the YEN trade so for many of us OIL has become less relavent. But I love Colin's no nonsense approach to building a system...

As far as triple double bottom stuff --- its not that significant and I've gone to a non linear, non optimized quantitative approach which has worked well over the last decade. Nothing spectacular but it pays the bills and the partners are happy.

BTW over the next few days you will see a nice spike in the carry trade against a beat up currency... There are two that are interesting --- consider this a New Years present... (one is a synthetic) (obviously this is just for fun since if you know how to create a synthetic cross you dont need my help)

In the interest of full disclosure --- this has happened and as a result at around 7:00pm before the Asian session my group will be closing out this position.

The payout of this position is roughly $45 million US per yard...not a bad 7 days of work... Colin was a professional currency trader and knows about all that yard stuff...I'm a relative piker...

P.S. Good call Colin