Anyone Think Oil Is In A Bubble?

[CactusWren]

Just thought you might want to check out this week's issue of Barron's on this topic. If I could only find my copy I'd be more specific...

 

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[MJ DeMarco]

I think the real value of oil is overvalued due to speculators. However, I don't think it will go down anytime soon. Investors are clamoring for the next big thing. First Tech Stocks, then Housing, and now, its OIL/commodities.

Access to markets for any investor is now readily available -- this is creating a spectacular run-up on prices. When the middle-class gets into these markets seeking crazy returns, prices skyrocket and values become unsustainable. Years ago, the average-joe-investor couldn't invest in oil unless they hit the futures market (which most would never do) -- today, everyone with a brokerage account can invest. This unprecedented access to markets is adding the run-up.

So my answer to the question -- I think oil will continue to rise as more speculators enter the market and drive prices up. Add in a weak dollar which will continue to erode and you have the makings of $180 oil.

Will it implode in bubble-like proportions? I don't think so but there will be periodic pullbacks of 10-15% like we see in all rapid ascensions.

Oil is now under $70 a barrel ... I love when our (my) pontifications can be proved wrong in just a matter of months!!! :iamwithstupid: So with OPEC planning to cut supply (you know, throwing salt in the global economic wounds) is it time to buy again?

 

[MJ DeMarco]

USD is also making record mid-term highs!

 

[fanocks2003]

So with oil continuing to increase in price, I was thinking to myself, "Wow, anyone invested in oil is likely making some $$$," but then I thought, "Every bubble in history is fueled partially bep eople who always think, 'This time, things are different,' as we saw with the tech bubble and housing bubble most recently, people thought tech stocks would keep growing and growing (even notable economists!) and they crashed, the same was said regarding housing, and that crashed too."

So I thought to myself, "Oil can't possibly keep increasing forever, can it?" but then I thought, "But IS this time different because of increased demand and limited supply...?"

So I Googled it and got two opposing viewpoints, one from Reason magazine (libertarian): http://www.reason.com/news/show/125414.html which says most likely yes, it is, and one from the New York Times economist Paul Krugman, who says, no, it isn't: http://www.nytimes.com/2008/05/12/opinion/12krugman.html

I was wondering what some of the investor folks here think? The articles directly argue each other. In the Reason article, they say that oil demand is inelastic, meaning if gas goes up by another dollar or so, you still have to fill your gas tank and drive to work. Over the long run, however, demand will decrease as people buy more fuel-efficient cars. They say it is primarily speculators driving oil prices right now, not supply and demand. However, the NYT article says the opposite, that if speculators drive up the price of oil, people will cut back on driving, turn down their thermostat, and owners of marginal oil wells would put them back into production.

I am not sure if I agree with Krugman (NYT) on the driving part, I think people already would have cut back on driving if they will do so, I don't know about the thermostat part (I hate cold!), regarding the oil wells, I have no idea with that but I would think that even with oil prices up, that the owners might be cautious to put them into production for fear that if prices drop again, this could be a problem; I don't think putting a well into production and then shutting it down again is as simple as flicking a switch. I don't know for sure though, I am no expert.

And Krugman also says that it isn't speculators, that this is just made up nonsense (directly contradicting the Reason article) and that it is supply and demand controlling oil prices, and that demand is squeezing supply. Reason says demand has actually decreased and surplus oil production is up, so...

What do you more knowledgeable folks think? Me personally, I am still guessing an oil bubble. Krugman says they were saying this back in 2005, but I mean the Dot Com sector actually started to collapse in 1999, but then recovered, then collapsed again in March 2000, then recovered again, and it wasn't until the Fall that stocks really started to crash permanetly, so bubbles can be persistent.

Part of me is a bit afraid that oil prices will keep increasing, but then the old historical "That's what they've said for EVERY bubble, that 'this time is different'" so I don't know. Also remember that the oil industry historically is cyclical, so prices should go back down at some point I'd think.

Bubble or not, supply and demand will drive it upwards more. I am trying to gather as much money I can to purchase buy futures on crude oil. Put it on 20 year futures contracts. Oil is predictable at this point.

 

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[randallg99]

USD is also making record mid-term highs!

now we see the reality of how dependent the world is upon the USA... the recent surge in the USD is a testament of how despondent many of the world currencies and economies are faring in comparison to USA

 

[lee]

I think it is a long term buy.
Short time, imho, it could fall further with recession just starting in other countries and most importantly the dollar risinng.

However, after this deflationary credit contraction is played out and the inflationary politics that the fed is pushing out right now hits that market the dollar will, imho fall to new lows, the recession in other countries will probably play out fast and with that oil will rise to new highs.

And don´t forget that it takes a certrain price to make new explorations, which are becoming more difficult/expensive rewarding and I am not sure if the prices we are seing right now are enough...

 

[andviv]

I think oil looks very good in the long term, buying below 70 sounds too good to be true IMO.

About the USD, I read a foreign article where they said people move to dollars when there is a recession because, historically, the American economy recovers faster than others. I don't know how accurate this is, or if the future will behave similarly to the past, but was an interest fact at least for me.

 

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[fanocks2003]

I think oil looks very good in the long term, buying below 70 sounds too good to be true IMO.

About the USD, I read a foreign article where they said people move to dollars when there is a recession because, historically, the American economy recovers faster than others. I don't know how accurate this is, or if the future will behave similarly to the past, but was an interest fact at least for me.

Anyone sane enough would see that oil supply will end very soon and that supply/demand will drive the price up. It is definately a long buy. Oil is even more interesting than gold.

 

[randallg99]

Anyone sane enough would see that oil supply will end very soon and that supply/demand will drive the price up. It is definately a long buy. Oil is even more interesting than gold.

I agree 110% and I have been a believer in peak oil for a few years.... however, the current pricing of us$70+/- might be here to stay unless the world economy starts showing some life again.

here are some excellent speeches and presentations regarding world oil supplies-

Simmons

regards

 

[randallg99]

...About the USD, I read a foreign article where they said people move to dollars when there is a recession because, historically, the American economy recovers faster than others. I don't know how accurate this is, or if the future will behave similarly to the past, but was an interest fact at least for me.

past recessions/depressions have shown this to be true as America has been the world's leading consumer for the past 150 years.

the us$ is absolutely stronger than just about any other currency in the world speaking in terms of fundamentals, politics and stability.... it's amazing and mind boggling how important this is for us as Americans.

 

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[fanocks2003]

I agree 110% and I have been a believer in peak oil for a few years.... however, the current pricing of us$70+/- might be here to stay unless the world economy starts showing some life again.

here are some excellent speeches and presentations regarding world oil supplies-

Simmons

regards

Oil will skyrocket. You'll see. Those who jump on the bandwagon now are the smart ones. Hold for 20 years.

 

[MJ DeMarco]

I just bought an energy play today and am going to try a swing trade ...... one thing about oil is this: While you can't control demand, OPEC can try to control supply. They are talking about cutting supply which is liking rubbing salt in the wounds of the world.

 

[kurtyordy]

what brokers are you guys using and what are the pros and cons of said brokers from your experience?

 

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[fanocks2003]

what brokers are you guys using and what are the pros and cons of said brokers from your experience?

Saxobank. No problem as far as I am concerned.

 

[randallg99]

just finished doing work and saw an article that oil demand came in waaaay under last year.... which is a serious blow to oil pricing.

for oil pricing to come back strong:

1. USA economy has to roar back
2. winter has to happen fast and furious
3. world economy has to pick up steam again
4. credit markets need to be revived
5. stock markets need to stabilize

probably more focus on equities these days as traders continue to unwind commodities trades but I am only thinking aloud and don't really know

we'll probably see some big swings but methinks short term (1 year +/-) trading for oil is a bearish scenario unless some variables change.... just maybe the election will do it and it's no secret that one party is very partial to oil/gas and the other isn't....

R

 

[randallg99]

.



Now, for my serious rant: what we are experiencing in the markets is a huge transfer of wealth from one sector to another and it's caused by the laws of unintended consequences.

There's a theory I agree with that's floating out there that the LTCM crisis of the late 90's prompted Fed bailouts designed to save world banking but instead led to the Nasdaq bubble... then the Nasdaq bubble prompted huge fed cuts to improve liquidity but led to the dramatic housing run up.... and now, the recent Fed Bailouts designed to save the mortgage/credit/housing markets is shifting dramatically to commodities. *which is where the problem lies... the commodities result in an "end use"... after we use oil, it's never again up for being reused, unlike stocks or housing... and this is a very damaging component to the ...

if the theory above holds true, then all of this bailout money thrown at the banks and the eocnomy is going to shoot something to the moon...

we need to find out what that is.... this will be the motherlode of all returns in history.

 

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[randallg99]

Hi -
has anyone been following NG or oil? JAN09 = $43.57

 

[AroundTheWorld]

if the theory above holds true, then all of this bailout money thrown at the banks and the eocnomy is going to shoot something to the moon...

we need to find out what that is.... this will be the motherlode of all returns in history.

alt energy (???)

 

[randallg99]

good point ATW. seeing that solar has been making a lot of headlines since Dems won the election it seems like that it has started its ascent... and I think you're right.

but who knows? seems like we are getting bubbles popped before we can blink... just a few months ago, we were hitting 150 bbl and now? 40+/- and even Gulf CEO predicts 20 bbl...

Gulf Oil CEO says gas could hit $1 next year - Quincy, MA - The Patriot Ledger

people will want to believe in alt energy. anyone have ideas for building companies that cater to this sector?

 

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[Russ H]

randall--

Given the massive profits last quarter by the oilcos, doesn't it seem to you that oil was bid up?

I have a hard time believing demand has gone down THAT fast.

Seems more like the speculators got out.

(but again, a disclaimer: When it comes to understanding markets, I suck, big time!).

-Russ H.

 

[randallg99]

randall--

Given the massive profits last quarter by the oilcos, doesn't it seem to you that oil was bid up?

I have a hard time believing demand has gone down THAT fast.

Seems more like the speculators got out.

(but again, a disclaimer: When it comes to understanding markets, I suck, big time!).

-Russ H.

Russ- a lot of the old text book rules about the markets have all been thrown out in the last several months.... what we're seeing IMO is the markets are truly reflecting human behavior and sentiment more than ever

yes, it definitely seems like the speculators got out.... wall street simply downsized and many of those traders are simply nonexistent.

like you, I have a hard time understanding why oil dropped so far and so fast and there are a few thoughts-

1. a lot of the exploration companies are leveraged. they need lenders and the $ wells dried up. (the irony is this should have the converse affect on oil pricing, but it has been the opposite)

2. OPEC is not in unison setting prices and goals, and Iraq is now swimming in oil fields that were only marginally operational just a few months ago

3. US demand did in fact go down. but timing was perfect - shoulder season, looming bad news for the economy, etc...

4. China had a lot of hype going into the olympics regarding their economy but even that economy is showing stress. To embark further: China was reported to have been hoarding years worth of supplies thus driving up the price even further

Saudi Arabia just put the floor in yesterday, so they say....

I think in hindsight, we just witnessed another bubble that popped. Realistically, if the oil prices stay at these levels, it can do two things:
1. help consumer spending capacity
2. entirely discourage expansion into alternate energy sources

all that said, I am a believer in peak oil and unless drastic changes are made in worldwide usage and dependency, oil/gas will have no choice but to shoot the moon when economic incline resumes.

 

[andviv]

I am thinking of redirecting my 401(k) into energy funds again in the short term. Buying at $40 bbl (or even in the 20's as I've heard as a real possibility) sounds too good to be true.

As timing is not a big issue here (it is a retirement account anyway) I don't see how that could be a bad move. Thoughts?

 

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[Edge]

I am thinking of redirecting my 401(k) into energy funds again in the short term. Buying at $40 bbl (or even in the 20's as I've heard as a real possibility) sounds too good to be true.

As timing is not a big issue here (it is a retirement account anyway) I don't see how that could be a bad move. Thoughts?

I currently look at oil in the same way as gold and other commodities. Just like many believe a falling dollar would be good for gold, I think it would mean higher oil prices also.

If you believe in a falling dollar, I think it is a good idea to look at oil. Even if we do enter into deflationary times, oil production could be cut to minimize the impact.

 

[randallg99]

I currently look at oil in the same way as gold and other commodities. Just like many believe a falling dollar would be good for gold, I think it would mean higher oil prices also.

If you believe in a falling dollar, I think it is a good idea to look at oil. Even if we do enter into deflationary times, oil production could be cut to minimize the impact.

I think we have to be careful: as the US$ has been making a downward descent in the past few years, we have recently seen the US$ spike against the EUR/pound/yen of which are arguably the better economies around the world at this juncture. this only tells me that we just might see deflating asset values regardless of sector since all the usual suspects are being shot.

lot's of really bad global news among the industrialized nations has legs to propel the US$ even higher.... (iceland, mexico, canada, europe) .... these are interesting times, indeed.

I think to play the oil/ng, we need to watch the supply and demand which is a better indicator at this point in time.

andviv - check the funds allocations. "energy" holdings encompass a wide spectrum of companies and can include a lot more than just oil/ng companies, exlporations, juniors, solar, wind, utilities, etc....

all said and done, I agree oil at 40bbl is ridiculously low

 

[andviv]

andviv - check the funds allocations. "energy" holdings encompass a wide spectrum of companies and can include a lot more than just oil/ng companies, exlporations, juniors, solar, wind, utilities, etc....

all said and done, I agree oil at 40bbl is ridiculously low

Yes, you are correct, but my 401(k) does not give me too many options. I think that energy and infrastructure will be both in an up-trend for the next decades anyway.

About 40bbl, what you think of 25bbl? Predictions: 9 For '09 In Executive Careers - Executive Careers - CNBC.com

 

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[kidgas]

I also agree that one of the ways we will likely see fiscal stimulus occurring is through infrastructure building (think TVA and depression). It is probably time anyway for a lot of our bridges to be overhauled given the collapse in Minnesota. I am not sure where the bottom for oil is, but I do think that starting to buy in now will be rewarded over the longer term. The transition to an oil free society will take a generation or more. As the price of oil comes down, the cost of goods (PPI, CPI) will come down as well. Eventually, demand will return and when it does, I would want to be ready.

 

[randallg99]

too many mixed signals to put a finger on a trend at this juncture. one would think we should stabilize at current levels with rig count slowing down.... but then usage is down worldwide, in USA and also in China where most of growth has been...

Bloomberg.com: News

any signs of economic recovery will have pricing shoot to the moon though....

 

[MJ DeMarco]

I wouldn't be worried about oil right now, I'd worry about the dollar. Your net worth as it relates to global purchasing power declined 5% in the last two days. If that continues, not only oil will be a problem, but anything else you buy.

 

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[andviv]

Where do you follow the dollar trend?

Has Gold and Oil shot up due to the dollar down-trend?

 

[Edge]

Anyone watching DXO or DTO?

DXO is the ultra long oil ETF, it started at about $25/share back in July and has dropped to about $2/share.

DTO is the ultra short oil ETF, it also started at $25/share in July and has rocketed to about $155.

When oil reverses course, it wouldn't take much to make a quick 100% return by either buying DXO or selling short DTO.

I'm keeping a close eye and probably won't be able to sit on my hands if oil drops to $32/bbl and DXO is trading at less than $1/share.