Contemplations on Oil

Posted by: madhedgefundtrader Post date: 10/14/2010 – 08:06 After a tumultuous 2009, oil has been one of the least volatile assets of 2010. It now appears that this crucial commodity is stretching its muscles, limbering up, and getting ready for a serious move. The net effect of the BP oil spill will be a cut of one million barrels a day of Gulf production, about 5% of US consumption. A serious run on the dollar is adding fuel to the fire. (USO), (XOM), (CVX), (OXY), (RSX) When Pigs Can Fly, the Devil Shivers in Hell, and 30% Gains in Western Stock Markets Will Mean Practically Nothing Posted by: smartknowledgeu Post date: 10/14/2010 – 05:04 Since March 6, 2009, the S&P 500 has seemingly been on a remarkable run, gaining 76.68% when priced in our favorite of monopoly currencies, the US dollar. However, when priced in gold, despite the daily rigging games of the government/banker cartel for the past two years, it has only managed to rise 21.64% over the same time span. When priced in silver, the S&P 500 has astonishingly lost 1.8% during the same investment period. To these enormous anomalies, we ask the question,”Will the real currency please stand up?” Navigation PollsDonate To Zero HedgeRecent posts Shopping cart View your shopping cart. User login Username: * Password: * Create new accountRequest new password Zero Hedge Reads Angry BearBearish NewsBoom Bust BlogChina Financial MarketsChris Martenson’s BlogContrary InvestorCoyote BlogCredit WritedownsDaily CapitalistDaneric’s Elliott WavesDealBookDealbreakerDr. Housing BubbleFalkenblogFibozachiFund My Mutal FundGains Pains & CapitalGlobal Economic AnalysisGonzalo LiraImplode-ExplodeInfectious GreedInvesting ContrarianJesse’s Café Américain Market FollyMax KeiserMinyanvilleMises InstituteNaked CapitalismOf Two MindsPension PulseShanky’s TechBlogThe Daily CruxThe Mad Hedge Fund TraderThe Market TickerThe Technical TakeThe Underground InvestorWall St. Cheat SheetWashington’s BlogWealth.netWhen Genius Prevailed Home madhedgefundtrader's picture Submitted by madhedgefundtrader on 10/14/2010 08:06 -0500

Ben BernankeCrudeDouble DipExchange Traded FundPrecious MetalsRecession

After a tumultuous 2009, oil has been one of the least volatile assets of 2010, confined to a tortuous $68-$88 range, frustrating momentum players to no end. How many city morgues are packed with the bodies of those who sold every dip and bought every rally, vainly hoping for a break out? By Friday, crude was down 3% on the year, virtually, the only hard asset showing a negative number this year.

Oil traded like it was on Ambien because it spent most of the year discounting a double dip recession. Bloated inventories encouraged hedge funds to build up substantial short positions. Some traders were targeting prices as low as $40.

After last week’s sudden burst, it now appears that this crucial commodity is stretching its muscles, limbering up, and getting ready for a serious move. The short position started to go badly wrong in early September. Forecast hurricanes failed to show. Wells in Nigeria, America’s third largest foreign supplier, started to explode again. Word has slowly been seeping out that the net effect of the BP oil spill, and the industry curbs that followed, will be a cut of one million barrels a day of Gulf production fairly soon. That is about 5% of the country’s total consumption.

Then Ben Bernanke threatened to launch a hoard of helicopters dumping money on the economy reminiscent of a scene from the classic Vietnam War flick Apocalypse Now, smothering any prospective double dips in the crib. All it took was a surprise plunge in inventories last week, and the short covering was off to the races.

A serious run on the dollar has added fuel to the fire. After running up virtually every hard asset to unimaginable heights in such a short time, investors desperate for returns in a zero return world are now rotating into Texas tea as a laggard. Until Ben Bernanke figures out how to make a barrel of oil with a printing press, money should pour into oil, as it has already into precious metals, industrial commodities, rare earths, and food.

I have always viewed any weakness in oil as temporary, and urged readers to accumulate positions on the cheap on many occasions. This extends to longs in the Russian ETF (RSX), the world largest oil producer and a major exporter (click here for “Buy Russia When Oil is Cheap” at http://www.madhedgefundtrader.com/september-10-2010-3.html ).

I must confess that I am an out-of-the-closet, card carrying “peak oiler”, and believe that it is just a matter of time before we punch through the 2008 $150/barrel all time high (click here for “The Price of Oil is Going Up” at http://www.madhedgefundtrader.com/august-5-2010.html ).

Avoid the ETF here (USO) because the tracking error is so huge. You would be better off buying my picks in the industry on any dips, including Chevron (CVX), ExxonMobile (XOM) (click here for “Pick up Big Oil While it is Still Cheap” at http://www.madhedgefundtrader.com/august-2-2010-3.html ), Occidential Petroleum (OXY) (click here for “Looking for Value at Occidental Petroleum” at http://www.madhedgefundtrader.com/july-7-2010-2.html ), and ConocoPhillips (COP) (click here for ConocoPhillips Looks Like a Steal” at http://www.madhedgefundtrader.com/august-17-2010-2.html .

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at http://www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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by williambanzai7
on Thu, 10/14/2010 – 08:38
#648974

Thank you for the Bernanke Apocalypse Now idea. You are right about peak oil long term.

What the traders do in the short term is just terrible jazz (i.e., Kenny G music).

Login or register to post comments by Sudden Debt
on Thu, 10/14/2010 – 09:19
#649107

When oil hits 86 = SHORT

Login or register to post comments by doolittlegeorge
on Thu, 10/14/2010 – 09:24
#649121

don’t here of many short sellers in this space, do ya.’  ahh, to have been a Rockefeller and had this realization!  By the time this family had “run their course” (one is a US Senator from WV of course) they called the entire city of Cleveland a “monster.”  That was meant as a compliment of course.  It is the “heart for rock n’ roll” no doubt.

Login or register to post comments by e1618978
on Thu, 10/14/2010 – 09:44
#649191

I don’t agree – the oil price has been discounting war with Iran, not a double dip.  Longs have been increasing worldwide oil storage to near record levels, and they can’t continue to do that forever.  At some point, you run out of places to put the oil.

Login or register to post comments by the mad hatter
on Thu, 10/14/2010 – 09:58
#649227

Oh MHFT, how you are despised for your shameless self-promotion on zerohedge. 

I do think, however, that you discuss some important points in this post. Peak oil is very real and is one of the reasons why the permagrowth Keynesian economic paradigm has crashed.

We share some common views my friend. Will you, the mad hedge fund trader, join me, the mad hatter, at my texas tea party? i do believe we shall have a jolly time.

Login or register to post comments by Nonconformist
on Thu, 10/14/2010 – 10:04
#649249

Not sure what the driver is for $150 oil but nice to see that you have figured out that USO is a fraud.  Just to help you out with your analysis of the energy industry, electric cars are not the future.

Login or register to post comments by e1618978
on Thu, 10/14/2010 – 11:05
#649476

USO is not a fraud, they are very upfront about the fact that if you go long the fund you will lose 2% (or so) per month via contango rollover.  Just use that to your benefit – short USO when you want to go short, and short SCO when you want to go long.

Login or register to post comments by Nonconformist
on Thu, 10/14/2010 – 11:16
#649512

Good point.  The tracking error with spot, that I have observed, is usually to the low side which also would help if your short.

Login or register to post comments by Montgomery Burns
on Thu, 10/14/2010 – 10:43
#649383

It all depends on your timeline. No doubt that at some point in the future oil will be well over $150.

Login or register to post comments by chistletoe
on Thu, 10/14/2010 – 11:42
#649587

“Word has slowly been seeping out that the net effect of the BP oil spill, and the industry curbs that followed, will be a cut of one million barrels a day of Gulf production fairly soon.”

 

What is your source for this?

This would be a cut of almost 20% of US production … including the North Slope,

the Bakken, West Texas, and all … doesn’t seem real likely to me …

 

Also, when anybody starts talking about oil over $100,

they must be discounting a whole lot of truck-driving, gun-totin americans,

many of whom are out of work and all of whom believe that cheap gas is guaranteed by the U.S. Constitution.  They are liable to have something to say about it at some point ….

 

Finally, if you don’t enjoy the built-in decay over at USO,

there’s a pretty obvious way to turn it around to your advantage.

I’ll let you work it out for yourself …

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