Post by Savant on Aug 6, 2004 4:08:56 GMT -5
Strategic Reasons for the Rise in Oil Prices - Published 05:10 EDT August 06 2004
US Stock Markets got badly rattled Thursday on what appeared to be a severe over-reaction to the price of Crude reaching up to new all time Nymex highs. Of course there are other nagging concerns, some that are apparent and others that have yet to be realized.
When the markets take the kind of dive they did on Thursday on relatively benign news, there are likely some unknown issues weighing on stocks that have yet to become known. Trying to figure what those are is hard, because the news has been mixed, if anything with somewhat of a more positive bias and even some well known perma-bear pundits were caught waxing very bullish of late.
Our last commentary ended with the words: We are at a crossroads where the going could be... Insert "Rough" as it turned out. Ugh...
We wrote those words at the start of the week out of a sense of impending unease over the markets newly developing behavior and regrettably, that unease manifested itself in recent days with very bad technical action in what has evolved as a steepening downtrend.
Can this be nipped in the bud?
Possibly, if the employment numbers are strong enough to turn things around. It's almost as if once again, the market is anticipating bad news, just as was the case the last time around, when we accurately predicted less than half the expected number of new jobs would actually be created and the numbers came in predictably worse than that. This time however, it's hard to make the same case, because the weekly numbers have been in the main constructive and somewhat supportive of higher non-farm employment numbers, that potentially could range between 150,000 and 300,000 with even the possibility of an outside surprise. Frankly it's a real crapshoot.
Anybody's guess really, but again we are testing critical support levels that must hold or reject prices once more. It now seems as if a mid-month low may be the ticket, or more optimistically a kind of reverse of July's trend, assuming we reverse over the next day or so.
That would imply a rally into month's end, that still has the potential to have some vigor to it, depending upon how well we reverse upwards and the unfolding technical structure that may or may not evolve.
The Crude Oil saga is somewhat of an enigma, because in large part it is being influenced by perfunctory news related items that have little or no material effect on the actual daily supply of oil and are more driven by the fear of disruptions rather than actual disruptions. We are referring to the pitiful situation surrounding Lukos Oil, which makes the "Billion Dollar Killing" pale in comparison to this heist.
We are in a parabolic upmove in Crude Oil, a classic short squeeze where potentially a lot of big money along with notoriously wrong hedge funds have been caught badly short this market and are getting killed as prices surge substantially higher. The power behind this move was exemplified yesterday, when a one-day break of about a dollar and a half in prices, was so aggressively bought up by those so desperate to get out of their shorts, the market exploded to new highs just hours later, indicating tremendous buying power.
The other reason behind the "short squeeze" may be less apparent but could be equally, if not more powerful and that is some kind of major error caused by "Black Box" trading gone wrong, possibly akin to the Long Term Capital debacle although likely a minor version.
The other element is the Strategic Petroleum Reserve. The U.S. Government has been topping up the SPR for several years now and they are finally approaching 100% capacity. Whilst topping up these reserves has created some premium in price, a few years ago, it seemed almost un-necessary to buy up additional reserves, as at that time, today's prices were hard to foresee. The fact that the U.S. Administration saw fit to be prudent and aggressively move to increase the Strategic Petroleum Reserves to maximum capacity, now appears not only to have been prescient, but a mild stroke of genius given the precarious conditions of today.
The problem may well have occurred or developed as a result of some government bean counters extending their limited knowledge and experience to the Futures markets by possibly trying to be too cute, by selling forward or shorting abnormally high spot prices and buying forward lower priced contracts months in the future. Whilst on the surface this might appear to be another stroke of genius, such a strategy could backfire and cause widespread panic, if the spot prices get out of control and heavy losses are being accumulated through excessive short positions, causing red faces in the Energy Department or other Government circles.
We do not know this has happened for sure.
At the moment it's just a theory, but it is a credible one, because this idea was bandied around when Oil prices were making lower peaks in the mid 30's. Whilst it may have worked for a while, greed kills and egos can destroy, so assuming someone exercised this strategy with some or perhaps a lot of success, they may not have had the discipline to cover their positions near the lows and may even have erroneously believed the market was going lower and possibly even added to their short positions, creating the conditions for the mother of all short squeezes and parabolic blowoffs in Crude Oil prices that now appears to be unfolding. Salutes to Jim Rogers co-founder of the Quantum Fund, one of the most successful funds ever, who called for a major upside surprise in the Energy sector.
Even though we ourselves called for a possible topping formation in the Energy sector a few weeks ago, we were kind of half-right with the exception of Crude Oil and Heating Oil, because Gasoline and Natural Gas actually went down quite a lot, and a couple of days ago, wholesale Gasoline Futures prices for September 2004 actually fell by 6 cents or more to around $1.20, before rebounding some, indicating a significant easing of pricing pressures that have been a major cause for concern among all of us gasoline consumers.
The fact that Crude Oil and to some extent Heating Oil have been surging independently, is somewhat of a rare anomaly that only happens once in a blue moon and is ultimately symptomatic of a major top. Other rare "Top of the Market" symptoms are asinine statements from a giddy OPEC president saying they can't pump any more Oil and big-grinning with glee as he is saying it, perhaps wondering aloud how many dollars per barrel, that kind of "crazy talk" as he called it, might add to Crude prices. The fact is, there is a developing glut in the energy sector that could come dramatically into play over the next few months:
Cheating is out the window and now OPEC can pump with abandon rest assured they are, just as anyone with a smell of oil around the World is doing as fast as they can to cash in on these unprecedentedly high prices. Price elasticity works and when the elastic band gets stretched too far and charts go parabolic, that invariably means the "Kiss of Death" is coming and maybe coming fairly soon, viciously and unexpectedly.
In fact, we would go one step further and even pose the idea that a few months from now US and other Global ports will be awash with Crude laden Super-Tankers lined up at anchor waiting for congested berthing spaces at unloading terminals to become vacant. And, if and when that happens, it will likely become major news and probably be accompanied by plummeting oil prices and rising stocks.
So that is our overview of the situation for now, we hope to resume our more comprehensive overview of all markets again next week.
Have a Great Weekend
Trade Well
Savant
US Stock Markets got badly rattled Thursday on what appeared to be a severe over-reaction to the price of Crude reaching up to new all time Nymex highs. Of course there are other nagging concerns, some that are apparent and others that have yet to be realized.
When the markets take the kind of dive they did on Thursday on relatively benign news, there are likely some unknown issues weighing on stocks that have yet to become known. Trying to figure what those are is hard, because the news has been mixed, if anything with somewhat of a more positive bias and even some well known perma-bear pundits were caught waxing very bullish of late.
Our last commentary ended with the words: We are at a crossroads where the going could be... Insert "Rough" as it turned out. Ugh...
We wrote those words at the start of the week out of a sense of impending unease over the markets newly developing behavior and regrettably, that unease manifested itself in recent days with very bad technical action in what has evolved as a steepening downtrend.
Can this be nipped in the bud?
Possibly, if the employment numbers are strong enough to turn things around. It's almost as if once again, the market is anticipating bad news, just as was the case the last time around, when we accurately predicted less than half the expected number of new jobs would actually be created and the numbers came in predictably worse than that. This time however, it's hard to make the same case, because the weekly numbers have been in the main constructive and somewhat supportive of higher non-farm employment numbers, that potentially could range between 150,000 and 300,000 with even the possibility of an outside surprise. Frankly it's a real crapshoot.
Anybody's guess really, but again we are testing critical support levels that must hold or reject prices once more. It now seems as if a mid-month low may be the ticket, or more optimistically a kind of reverse of July's trend, assuming we reverse over the next day or so.
That would imply a rally into month's end, that still has the potential to have some vigor to it, depending upon how well we reverse upwards and the unfolding technical structure that may or may not evolve.
The Crude Oil saga is somewhat of an enigma, because in large part it is being influenced by perfunctory news related items that have little or no material effect on the actual daily supply of oil and are more driven by the fear of disruptions rather than actual disruptions. We are referring to the pitiful situation surrounding Lukos Oil, which makes the "Billion Dollar Killing" pale in comparison to this heist.
We are in a parabolic upmove in Crude Oil, a classic short squeeze where potentially a lot of big money along with notoriously wrong hedge funds have been caught badly short this market and are getting killed as prices surge substantially higher. The power behind this move was exemplified yesterday, when a one-day break of about a dollar and a half in prices, was so aggressively bought up by those so desperate to get out of their shorts, the market exploded to new highs just hours later, indicating tremendous buying power.
The other reason behind the "short squeeze" may be less apparent but could be equally, if not more powerful and that is some kind of major error caused by "Black Box" trading gone wrong, possibly akin to the Long Term Capital debacle although likely a minor version.
The other element is the Strategic Petroleum Reserve. The U.S. Government has been topping up the SPR for several years now and they are finally approaching 100% capacity. Whilst topping up these reserves has created some premium in price, a few years ago, it seemed almost un-necessary to buy up additional reserves, as at that time, today's prices were hard to foresee. The fact that the U.S. Administration saw fit to be prudent and aggressively move to increase the Strategic Petroleum Reserves to maximum capacity, now appears not only to have been prescient, but a mild stroke of genius given the precarious conditions of today.
The problem may well have occurred or developed as a result of some government bean counters extending their limited knowledge and experience to the Futures markets by possibly trying to be too cute, by selling forward or shorting abnormally high spot prices and buying forward lower priced contracts months in the future. Whilst on the surface this might appear to be another stroke of genius, such a strategy could backfire and cause widespread panic, if the spot prices get out of control and heavy losses are being accumulated through excessive short positions, causing red faces in the Energy Department or other Government circles.
We do not know this has happened for sure.
At the moment it's just a theory, but it is a credible one, because this idea was bandied around when Oil prices were making lower peaks in the mid 30's. Whilst it may have worked for a while, greed kills and egos can destroy, so assuming someone exercised this strategy with some or perhaps a lot of success, they may not have had the discipline to cover their positions near the lows and may even have erroneously believed the market was going lower and possibly even added to their short positions, creating the conditions for the mother of all short squeezes and parabolic blowoffs in Crude Oil prices that now appears to be unfolding. Salutes to Jim Rogers co-founder of the Quantum Fund, one of the most successful funds ever, who called for a major upside surprise in the Energy sector.
Even though we ourselves called for a possible topping formation in the Energy sector a few weeks ago, we were kind of half-right with the exception of Crude Oil and Heating Oil, because Gasoline and Natural Gas actually went down quite a lot, and a couple of days ago, wholesale Gasoline Futures prices for September 2004 actually fell by 6 cents or more to around $1.20, before rebounding some, indicating a significant easing of pricing pressures that have been a major cause for concern among all of us gasoline consumers.
The fact that Crude Oil and to some extent Heating Oil have been surging independently, is somewhat of a rare anomaly that only happens once in a blue moon and is ultimately symptomatic of a major top. Other rare "Top of the Market" symptoms are asinine statements from a giddy OPEC president saying they can't pump any more Oil and big-grinning with glee as he is saying it, perhaps wondering aloud how many dollars per barrel, that kind of "crazy talk" as he called it, might add to Crude prices. The fact is, there is a developing glut in the energy sector that could come dramatically into play over the next few months:
Cheating is out the window and now OPEC can pump with abandon rest assured they are, just as anyone with a smell of oil around the World is doing as fast as they can to cash in on these unprecedentedly high prices. Price elasticity works and when the elastic band gets stretched too far and charts go parabolic, that invariably means the "Kiss of Death" is coming and maybe coming fairly soon, viciously and unexpectedly.
In fact, we would go one step further and even pose the idea that a few months from now US and other Global ports will be awash with Crude laden Super-Tankers lined up at anchor waiting for congested berthing spaces at unloading terminals to become vacant. And, if and when that happens, it will likely become major news and probably be accompanied by plummeting oil prices and rising stocks.
So that is our overview of the situation for now, we hope to resume our more comprehensive overview of all markets again next week.
Have a Great Weekend
Trade Well
Savant
