In retrospect, it was easy to call the top in oil. When cartoons like this appeared, it was clear that high oil prices had penetrated the public consciousness – a contrarian sell signal.
Now that the oil price has descended about $30 from its peak and other commodities have also been hammered, it’s time to become more constructive on crude. While downside risks remain (e.g. cyclical US slowdown affecting commodity prices, China slowing, US$ in rally mode, etc.), I would like to review the bull case for oil prices and detail the reasons why I remain a long-term oil bull.
Peak Oil
I could go on and on about Peak Oil but I refer you to the site Oil Drum and Matt Simmons’ speeches for more detail. It isn’t about the world running out of oil but more about world oil consumption running into extraction limits. Robert Hirsch wrote an important report for the US Department of Energy back in 2005 discussing these concepts and how to mitigate their effects.
Peak Oil Concepts
Peak Oil mitigation: 9 women can’t have a baby in 1 month
Hirsch’s conclusion was that the US needs to invest in alternative technologies now, because mitigation technologies take time. Put it another way: nine women can’t have a baby in one month – no matter how hard they tried.
If we are indeed facing Peak Oil in the immediate future then the secular trend for energy prices is up and will continue to rise until a combination of alternative energy and conservation measures kick in. This bull would have a long way to go.
Global cooling?
What I am writing here may be sacrilege to some people. The popular consensus about Global Warming is that the Earth is undergoing a warming period caused by the effects of industrialization. However, there is another view that global warming is caused by solar activity – sunspots and solar winds.
Currently, the forecast for the latest solar cycle is that it’s late. Such extended cycles have been associated with cooling periods such as the Little Ice Age experienced a few hundred years ago. Indeed, there have been reports that there is more ice in the Arctic (yes – it’s only one data point) and there has been some hand wringing among the scientists about the timing of the solar cycle.
Is this theory about solar activity correct? I have no idea. I do have allow for the possibility that it is a valid one and should the Earth enter a cooling period, this would be bullish for energy demand and result in higher energy prices.
Heebner still bullish on Energy
In a post back in early June comparing Bill Miller and Ken Heebner, I noted that Ken Heebner had a hot hand largely because of his overweight position in resources and underweight position in Financials. Moreover, Heebner does not hesitate to turn over his portfolio if he thinks that it is positioned improperly.
The chart below shows the Heebner’s latest imputed position in the Energy sector. Despite the recent rally in Financials and the air pocket hit by Energy, Heebner may have trimmed back some of his Energy overweight and is now adding back to his position.
[Chart corrected from original, which had erroneous x-axis]
You have to respect Heebner's views given his record.
Investor sentiment is bearish
Finally, in the short term, investor sentiment on crude has retreated to levels that warrants taking a less bearish stance. While oil prices may not rocket up from these levels, these readings do suggest a period of stabilization or consolidation in price.
A nervous bull on oil
Given that oil prices have retreated about $30 from their peak, I believe that the near-term upside and downside price risks are far more balanced and would be inclined to be more constructive on the oil price. Does that mean that it can’t go down any more? Of course not, there remain substantial risks to buying here. However, if you are playing the odds then the probabilities are now tilting more in favor of the bulls.
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This article has 30 comments:
- Ishortyou
- 408 Comments
Aug 08 08:41 AM- CLH
- 622 Comments
Aug 08 08:52 AM- looper44
- 1 Comment
Aug 08 09:40 AM- mangolfer
- 157 Comments
Aug 08 10:29 AM- buyitcheap
- 427 Comments
Aug 08 10:52 AM- icandoitdon
- 371 Comments
Aug 08 10:57 AMi thought "speculation doesn't drive oil prices."
even the morons at goldman sachs were proclaiming ever-higher prices as the consuming nations' economies slowed.
let's hear from all those perma bulls who couldn't recognize a speculative bubble if it bit them in the ass.
- Marcus Aurelius
- 38 Comments
My Website
Aug 08 11:08 AM- Adolf
- 2 Comments
Aug 08 11:18 AM- gabe borenstein
- 183 Comments
My Website
Aug 08 11:37 AMOne thing for sure the global growth could not possibly explain the 400% increase of the oil price from its long term average.
Clearly ,unprecedented global speculation in the crude ,was responsible for the spike.
Severe contraction in the period ahead in Europe and the Emerging Market Zones,may further undermine the demand for the energy .
Then again ,wind power ,solar power and the new promising alternative to oil,Canadian oil sands might make a dent in the crude prices .
One thing for sure in this cycle speculation not the global growth ,had contributed to the unprecedented price spike in the crude.
- bodyquest
- 1 Comment
Aug 08 11:47 AM- investor88
- 600 Comments
Aug 08 12:01 PM- zenalgorithm
- 158 Comments
Aug 08 12:18 PMI love how Goldman upgraded oil services about 4 weeks ago when oil services had just hit the peak in its obvious trading range.
Goldman would stab your grandma in the back if it were profitable...
- alpha24seven
- 170 Comments
Aug 08 12:26 PMLol...
- Jake Huneycutt
- 118 Comments
Aug 08 12:32 PMFirst off, global climate changes can take place over thousands (even tens of thousands) of years. Hence, it wouldn't exactly be wise to bet on "global cooling" whether or not you believe that human activity is to cause for global warming. It's not like the stock market where cycles can last for a year or so before things shift the opposite direction.
Second, I don't know that "global cooling" would have a major impact on energy consumption; or at the very least, it wouldn't in a short enough period of time to actually make investing based on that belief seem all that prudent.
Finally, it's kind of silly to "allow for the possibility" that the Earth might enter a "global cooling trend" without any sort of evidence suggesting that. It's like saying I need to "allow for the possibility" that aliens will abduct the CEO of a company and replace him with an incompetent buffoon who deliberately hampers operations in a grand scheme to lower Earth's production ability and take over the world. Certainly, I can't rule out the possibility of that occurring but it seems at best remote and not really something I would take into account when investing. A massive global cooling trend, while not quite as insane as my example, is not a likely-enough occurrence to factor in given the current data and science on the matter.
- Badger The Lion
- 6 Comments
My Website
Aug 08 01:20 PMbadgerthelion.blogspot...
- alpha24seven
- 170 Comments
Aug 08 01:21 PMDunno...
Oleg Sorokhtin is a fellow of the Russian academy of natural sciences. He writes in an article for the Russian news and information agency that a cold spell will set in by 2012. H believes an even colder period will begin as solar activity reaches a minimum in 2041 — and that it will last 50 to 60 years.
Sorokhtin says warming and cooling are entirely natural processes — independent of human activity. He says the current warming trend is due to changes in things like solar activity, ocean currents, and salinity fluctuations in Arctic waters.
Meanwhile, British weather experts say 2008 will be the coolest year since 2000 because of a drop in sea surface temperatures off the western coast of South America — known as La Nina. But they say this year will still be one of the 10 hottest years on record.
- maximax
- 47 Comments
Aug 08 01:22 PM- mkreisel
- 272 Comments
Aug 08 02:45 PMAlthough I'm also bullish on oil, I will watch market actions carefully. If the chart tells me to sell, I will sell.
- xpatUSA
- 29 Comments
My Website
Aug 08 06:32 PMgabe, they've been extracting oil from there for quite a while, AFIK. It's bitumenous oil, thick and quite hard to extract. Were you perhaps thinking of the Williston Basin (thin layers of light, sweet crude-bearing shale) up there in Montana, North Dakota and Saskatchewan?
T.C.
- ICouldBeWrong
- 36 Comments
Aug 09 06:09 AMI also wonder if the recent period of global warming is entirely natural, was possibly caused by solar activity and will give way to a global cooling period some time in the next decade.
People who are skeptical of peak oil should read Hubbert's 1956 paper nuclear energy and the fossil fuels (google for it). Honestly it's simply a question of when not if.
But even though I believe in peak oil, and worry about resource wars I'm not a doomer. I believe where this is a will there is a way and we will not only solve our energy crisis but eventually (no pain no gain) move forward to a future of cheap and abundant energy. (See my previous comments on Polywell fusion here on seeking alpha).
Regarding trading. On Friday I went short S&P500 futures, short XLF, long gold, silver, oil futures.
Especially the oil futures were risky, and there's every possibility I was too early. But this invasion of Georgia by Russia this weekend might help my case. And I can't buy this US dollar rally, the real resistance is 78-80 on the dollar index, the housing market is still going down, and bad surprises keep on coming out of the financials.
The xlf broke down on Thursday out of a month long linear uptrend, retraced on Friday but couldn't break through resistance from the break down. S&P500 now at 50 day moving average resistance, at round number resistance (1300), at triple top resistance (1290-1300), and is in a month long bearish rising wedge formation.
Maybe I'm wrong I'm trading light position sizes with carefully chosen stops.
- john s. gordon
- 585 Comments
Aug 09 08:42 AM> jack
- Dan Walker
- 73 Comments
Aug 09 09:26 AMI could be wrong as well, but I am almost with you. I have been buying some physical silver the last week or so and bought my first physical gold yesterday. I picked up some OTM S&P puts on the close today but let me share why I have approached this so lightly.
Number one, this is an election year and I would wager the PPT was called back from vacation a week ago because of the chart patterns the remainder of the month. Number two will require further contemplation and I may have an article to publish about this next week, but the gist is that possibly more money has been destroyed by the credit crisis to date than has been printed by the Fed. That is a sobering thought when contemplating gold. Oil is a bit different, but lets not overlook (although SA is about the only place any evidence remains) that we had an oil trading company which took 3.2B in losses on spec (as opposed to hedging) positions and the CTFC (with heavy prodding) found one account who held over 10% of the total futures and options volume for one month. It is still not clear (to me) if we are talking about the same or two different accounts.
Be careful, my friend. In a pure capitalism, the odds favor an equity decline given the current setup. Personally I believe we will at least retest that 1200 low. But we are now in the age of socialist capitalism where the market will do what it will until it rolls over the wrong toes. On gold, I still expect at minimum $20-30 more down. Same caveat. Oil is on its way to $70bbl with everyone looking over their shoulder to see who is aiming what at whom. As you pointed out, it will decline until the first shot followed by a quick trip to the penthouse. That is where oil and the dollar index swap leads. Quickly.
And finally, my congratulations again to Mr Cam for a bold, timely, and very prescient oil call.
- nakedjaybird
- 397 Comments
Aug 09 02:20 PMAug 09 01:37 PM
Jim - A fleeet of pure electrics (Pb-acids and Fe-Ni's while R&D'ing Ni hydrates, Ag-Fe's, Li-air, etc.,) existed in the late 1960's early 1970's while waiting for the cost of electricy and gasoline to cross and also while waiting for the consumer to latch onto the acceptable idea of a small, underpowered, commuter car: never happened.
However, there's a role and market for the pure electric <50 mile range; it will take a hybrid for the market >50 miles. Battery maintenance, life, cost and lifecycle cost will forever be basic issues sans consumer related issues of safety and practicality, etc.
In the meantime, the reduction in transportation energy will evolve as it did during the several 70's oil/gas crisis'.\: REDUCE/REUSE/REPLACE which is the order of increasing cost of change.
So we basically are in the REDUCE mode, except for those that can afford to REPLACE (buy a Prius, etc.). For the general Joe Public that means he/she must lose or yield some FREEDOM:
0) DON'T GO!
1) walk, ride a bike, (NO CONSUMPTION WHATSOEVER).
2) double-up via car-pool, van-pool (ECONOMIZE).
3) use public transportaion (REALLY ECONOMIZE).
All of the above will reduce consumption of fuel. They REALLY work. They have immediate results (at reduced out-of-pocket costs). The cheapest way out of Dodge.
Someone should instigate a NATIONAL REDUCE CONSUMPTION EXPERIMENT for a week or month to see what the effect can really be. The result may be that many of the people actually like it.
Public transportation will love it. So will those that still commute alone at a higher cost.
The next least capital expenseive move would be to put more hiway transport onto the steel-wheeled rail cars; be it people or goods. Like Switzerland does.
Then Warren Buffet should fully electrify those rails and get rid of the diesel consumption (while Bill Gates electrifies the interstate highways/beltways AND Boone et.al. install solar and wind as if the world were coming to an end).
And as many as possible Prius et.al. should be mfg'd to scratch the itch of those that can afford them.
And "someone" should come up with that biofuel-injected no-moving-parts-burner with that waste heat solid-state direct-coversion-to-el... ChorusMotor driven hybrid that uses 100% of the energy in the biofuel, which we grow on the surface of dryland farms currently in CRP programs where farmers get paid to do nothing: as a starting point for ADVANCED REDUCTION/REPLACEMENT OF NATURAL RESOURCE ENERGIES (which is another name for no drill, no drill, no drill and no dig, no dig, no dig, etc.).
ps - jIM - I forgot to mention and maybe you recognized it, that the biofuel hybrid I mentioned DOES NOT have an on-board stored energy device other than the tank of biofuel: no battery required; no flywheeL; no capacitor, etc. Any of which would be fine if they happen to really be required, which I doubt because the solid state conversion to electric devices would be at power instantly upon source of heat - which means when the fire it lit.
- GUY FOX
- 13 Comments
Aug 09 08:01 PM- scfranklin94
- 47 Comments
Aug 10 02:52 AMKudos to Cam Hui with his gutsy call of $100 before $150; he called it when oil was already over $140 and looked like a shoe-in to $175.
Meanwhile, I can see crude drifting down to $100, but I don't see $70; why? Because retail gasoline will shortly be $3.35 and at $100 it will be closer $3.00 to $3.10. People respond to prices and unfortunately lower gasoline costs will allow demand to grow faster. When gasoline was $4.50 everyone was looking at alternatives; at $3.00 I suspect the majority of people will think it's relatively cheap.
- cynic69
- 236 Comments
My Website
Aug 10 08:44 AM- nakedjaybird
- 397 Comments
Aug 10 11:04 AMWe could do the same thing today without a supply problem and lower our oil consumption IMMEDIATELY. I guarantee you it would be effective AND PERMANENT as long as the folks wanted to pool etc. That would free up a lot of oil. We'd flood the market - more than China and India could soak up.
If we use 20 million gallons/day and consumed 10-15% less, our reduciton would match all of China or Indias current consumption.
So do the numbers: 2 in a car instead of 1 as 100% reduction; now multiply that by 50 million commuters as twosies, threesies, 10ies and 40ies, etc. Pretty soon ya got a pretty good reduction. WE OUGHT TO RUN THE EXPERIMENT FOR A MONTH (OR UNTIL IT BECOMES A HABIT - THEN WE'VE REALLY DONE SOMETHING).
Then we can start of putting more cargo and people on trains; electrified trains.
And "Turn Me Loose" Pickens.
This is the mantra we should be hearing from Kudlow, DC, and all campaigners, including Bush who doesn't need to be elected and sits at the bully pulpit: CAR AND VAN POOL, FOLKS: REDUCE THAT CONSUMPTION AND SAVE IN MANY WAYS. INSTEAD, IT'S DRILL, DRILL, DRILL.
REALLY SAD!!!!!!
LEADERSHIP SUCKS!!!!!!!
- Leser
- 42 Comments
Aug 10 09:27 PM(Kudlow, let the others on your show finish their sentences! Grow up as a professional show moderator!)
- nakedjaybird
- 397 Comments
Aug 11 02:09 AM- ahs8flyer
- 1 Comment
Aug 15 09:04 AMMore by Cam Hui