Anyone Think Oil Is In A Bubble?

[randallg99]

So, what do we do?

1) Avoid Oil because it is in a speculative bubble?
2) Play the bubble to the upside.....or, play it for the down side?
3) If you're gonna play it, how will you play it? Producers, equipment, pipelines, shipping, or do your own prospecting?

Personally, I started dabbling in prospecting last summer.

great questions, Hoop.

I believe oil valuations are here to stay - unfortunately the only thing that will stop the steep incline is the US economy that will stop in its tracks - I am keeping my eyes glued to the unemployment numbers and frankly they appear a bit skewed at first glance.

initially, I owned many Canadian Royalty Trusts and Canadian Oil Sands to play both oil and natural gas. I held many different units but was heavily concentrated in those as well as SWN, UPL and CHK.

I sold all of the above shortly after a Canadian law restricted tax exclusions of the trusts a couple of Halloweens ago.

Since then, my thoughts to play the oil arena changed by investing more in the infrastructure instead of the commodity itself because at $100+ levels, all of the exploration and other infrastructure companies can now borrow, spend and afford enormous projects including ocean drilling, transport and shipping.

I have owned and continue to trade in and out of FRO and SFL.

Currently, one of my largest holdings is SeaDrill which I have owned for about a year and a half.

Do your own DD and good luck.

R

 

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[TheGreatBear]

I'm doing nothing. No need to gamble...

 

[Runum]

1st- yes, we are in a bubble.
2nd - yes, it will pop. But not for a long time... after the olympics end in china, we may see a slow down in pent up demand

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

I agree. From what I observe, investors seem to travel from one hot investment to another and all of them want to be first. Many moons ago information about investments was not so readily available so the shifts from one investment to another were slower and not as noticeable. Around the late 80's and early 90's the internet became more popular and information to everyone ramped up dramatically. Now, when one investment is hot everyone and his brother heads that way to get a piece of the pie. I think that is what has made several of the big bubbles such as the tech bubble in 2000. So, IMHO, more global information and more global investors and speculators are going to lead to bigger and bigger bubbles. I have no research to back this up, just what I see and think.:fastlane:

 

[Venturer]

One important lesson I've learned in speculating with comodities is not to think. Thinking gives you the false impression that you can predict what the price will do. Unless you're a psychic, you can't.
Instead look what the price is doing and benefit from it while it's moving, whether up or down.

To contradict myself, of course I have an opinion. World oil demand will continue to increase. The price will continue to rise with a sinus movement around that rising line. I expect that sinus movement not to have an amplitude of more than 5%.

 

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[Runum]

One important lesson I've learned in speculating with comodities is not to think. Thinking gives you the false impression that you can predict what the price will do. Unless you're a psychic, you can't.
Instead look what the price is doing and benefit from it while it's moving, whether up or down.

To contradict myself, of course I have an opinion. World oil demand will continue to increase. The price will continue to rise with a sinus movement around that rising line. I expect that sinus movement not to have an amplitude of more than 5%.

Haha, I guess that says a lot about me and why I'm not in commodities, other than for consumption. I have to think about my investments.:cheers:

 

[Hoop]

Not bubble but oil/gas related....my local newspaper discussed high gas prices today and noted that banks are making a killing. I never thought about it before, but they get a few points from every credit card transaction. If gas goes up $1.00 a gallon, they stand to earn an extra $0.02 per gallon.

This is almost pure margin for them as their costs haven't increased in the transaction: no increased COGS, no increased marketing, R&D, distribution. Pure margin.

 

[Adam K]

Its amazing how high oil prices are getting. Deleted. Political comment.

 

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[WheelsRCool]

Its amazing how high oil prices are getting. Deleted political comment.

The President has nothing to do with the price of oil. The American oil industry overall has little to do with it in terms of ability to control prices. It's supply and demand, speculation, fear, greed, all sorts of factors.

 

[andviv]

watch it guys... this is becoming a political thread.
As mentioned before, there are lots and lots of places to talk about politics but this forum is NOT one of them.

 

[andviv]

Edge, Rep++
I like a lot posts that tell me different strategies about how to make money. Yours is just like that. Now let's see if I can understand it and apply it (you know I am not savvy at all with shares, options, collars... I have no edge )

 

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[randallg99]

a couple of thoughts- if anyone thinks pricing of oil/gas is determined by our government, then you have got another think coming...

and secondly... I really need help with this... someone please provide a link that American average miles driven last month went down the largest percentage in 2 decades.


this is a serious data point ...

 

[Runum]

I think this is what you're talking about.

http://www.marketwatch.com/news/sto...x?guid={93E83ED2-0EE6-48BF-B104-D82FE8A93D70}

http://www.usatoday.com/money/industries/energy/2008-05-23-gas-prices-friday_N.htm?csp=34

I got them from this website that has a bunch of sources.

http://www.insideautomotive.com/

 

[TheGreatBear]

I agree. From what I observe, investors seem to travel from one hot investment to another and all of them want to be first. Many moons ago information about investments was not so readily available so the shifts from one investment to another were slower and not as noticeable. Around the late 80's and early 90's the internet became more popular and information to everyone ramped up dramatically. Now, when one investment is hot everyone and his brother heads that way to get a piece of the pie. I think that is what has made several of the big bubbles such as the tech bubble in 2000. So, IMHO, more global information and more global investors and speculators are going to lead to bigger and bigger bubbles. I have no research to back this up, just what I see and think.:fastlane:

Actually the major financial bubbles have coincided with advancements in communications technology. I remember something about the telegraph, the phone, the internet...
I think it's in "The Undercover Economist" when the author attempts to dissuade people from thinking that better connected=better informed.

 

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[randallg99]

Actually the major financial bubbles have coincided with advancements in communications technology. I remember something about the telegraph, the phone, the internet...
I think it's in "The Undercover Economist" when the author attempts to dissuade people from thinking that better connected=better informed.

the "new age" way of investing is much faster than before.... jumping on and off the bandwagon is as easy as a computer click...

they may not be better informed, but they are definintely faster and consequently the markets are more succeptible to large gyrations

 

[randallg99]

lot's of people talking about an oil bubble that seems to be topic du jour around the bbq grill....

but my argument was this: CNBC and alot of other commentaries were pounding the table on many things that have proved absolutely wrong

they said that no way oil will stay above 50, or 60, 70... 100.... 130.... just only recently have I heard the bloomberg radio interviews all but concede the high prices are here to stay...

they also said the economy will come to a screeching halt if oil stayed above 50, 60, 70 then 80 and ironically enough the gov't keeps spewing positive economic data (I still can't figure that one out)

I still believe world demand will keep the pricing high. there is room for retracement and any relief is potentially short lived.... IMHO

interesting commentary - take it for what it's worth:


An Oil Bubble?

Bubble or no bubble, we think the oil price will fall by a minimum of 30% from last week's high or whatever new high it makes over the coming fortnight.

"Bubble" has become one of the most over-used and misused terms in the financial world. It seems that whenever any market rises rapidly these days it will be assigned the "bubble" label by many commentators and analysts. However, for a market to be in bubble territory its valuation must be so high that it could only be justified by making absurd assumptions about the future.

It's easier to identify a stock or property market bubble than to identify a commodity bubble because commodities don't have valuation metrics such as earnings and dividend yields. If a stock market is priced at more than 50-times earnings, as was China's stock market last October, then it is clearly in a bubble because it is not possible for any economy to deliver sufficient real earnings growth to justify such a valuation. And if the median residential house price has risen to more than 6 times the average annual wage, as is currently the case in Australia, then it can reasonably be said that a property market bubble is in progress. But how do you know when a particular commodity is over-valued to the extent that it can rightly be called a bubble?

One possible way would be to check how the commodity in question has performed relative to other 'things'. In particular, if the price of a commodity has reached an historic extreme relative to the prices of many other things then the term "bubble" may be applicable. On the other hand, the adjustment in relative prices could be an accurate reflection of sustainable changes in the supply of and the demand for the now expensive commodity, meaning that "bubble" would be a misnomer.

So, is the oil market currently in bubble territory?

We suspect not, but we do think it is headed for a big fall because it has moved way too far way too fast. It's price gains over the past several months have not only pushed it to rarified heights in nominal dollar terms, it has become very expensive relative to real money (gold) and almost everything else at a time when the pace of global economic growth is slowing.

The bulls will undoubtedly claim that oil doesn't have a lot of downside risk because its supply/demand fundamentals remain very bullish, but even the most solidly underpinned long-term bull markets periodically experience big downward corrections. For example, the first of the weekly charts displayed below shows that the uranium price is now less than 50% of what it was at last year's peak. Has there been a major deterioration in uranium's fundamentals? No, the bullish uranium story is still very much in place. What happened was that the market got way ahead of itself and had to adjust. (Interestingly, when uranium traded in the $130s at around this time last year there was a lot of talk about the potential for a $200 price tag. Sound familiar?)

Also presented below are weekly charts illustrating two other recent examples of commodity markets that experienced spectacular price run-ups followed by equally spectacular price declines. The first of these charts shows the dramatic rise and fall of the nickel price. There has been a large increase in the supply of nickel since last May's price peak, but note that the 2-month plunge that followed the peak occurred while the metal remained in short supply. The second of these charts shows wheat's move from $7.50 to $14.00 and then all the way back to $7.50 within the space of just 7 months. In real terms wheat was still quite cheap when it traded just below $14/bushel during the first quarter of this year, but that didn't prevent its price from quickly falling by more than 40%.

Bubble or no bubble, we think the oil price will fall by a minimum of 30% from last week's high or whatever new high it makes over the coming fortnight. Due to the potential for an unforeseeable supply shock we wouldn't seriously consider shorting oil futures in anticipation of such a decline, but in our opinion a small position in US Oil Fund (USO) put options would be a reasonable speculation at this time. USO is designed to track movements in the oil price, although USO's price is presently much lower than the oil price due to the way the fund is structured. A daily chart of USO is included herewith.

When oil moved above $128/barrel last week we began to average into USO October-2008 $90 put options (UNAVL) in our own account. We have also decided to add these options to the TSI Stocks List at Friday's closing price of US$4.10.

For those interested in the above-mentioned speculation the right approach, we think, would be to take an initial position immediately and to then average in over a 1-2 week period, preferably on days when the oil price is up. Note that we generally wouldn't risk more than 1% of our portfolio on a speculation such as this.

As an aside, oil's upside blow-off is being accompanied by a downside blow-off in the airline sector. The two stocks that comprise our airline trade (CAL and CPA) are obviously being hurt by oil's strength and would almost certainly be given a hefty boost by a trend reversal in the oil price, but for new money we would favour a more direct bet against oil's continuing rise.

Meat

One commodity group that does not look either bearish or over-extended to the upside on an intermediate-term basis is meat (cattle and hogs). As evidenced by the following weekly chart, live cattle futures appear to be in the relatively early stages of an intermediate-term advance.

We have no opinion on what the prices of cattle and hogs will do over the next several weeks, but we think there's a high probability of large price gains over the coming year.

 

[Runum]

Actually the major financial bubbles have coincided with advancements in communications technology. I remember something about the telegraph, the phone, the internet...
I think it's in "The Undercover Economist" when the author attempts to dissuade people from thinking that better connected=better informed.

the "new age" way of investing is much faster than before.... jumping on and off the bandwagon is as easy as a computer click...

they may not be better informed, but they are definintely faster and consequently the markets are more succeptible to large gyrations

I agree. Great observations. ++++speed.

 

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[randallg99]

for all of you bubble heads, I wouldn't want to bet against you now that you have Soros on your side.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnsoros126.xml

George Soros: rocketing oil price is a bubble
By Edmund Conway, Economics Editor
Last Updated: 12:53am BST 27/05/2008



Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned.

The billionaire investor's comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark.

In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation.


Telegraph TV: George Soros on oil prices


"Speculation... is increasingly affecting the price," he said. "The price has this parabolic shape which is characteristic of bubbles," he said.

'We face the most serious recession of our lifetime'
The comments are significant, not only because Mr Soros is the world's most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices.

Oil prices stalled on Friday after their biggest one-day jump since the first Gulf War earlier in the week.

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At just over $130 a barrel, the price has doubled in around a year, causing misery for motorists and businesses.

However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.

"You can also anticipate that [the bubble] will eventually correct but that is unlikely to happen before the recession actually reduces the demand.

"The rise in the price of oil and food is going to weigh and aggravate the recession."

The Bank of England recently warned that soaring energy and food costs would push inflation above its target range for most of the next 18 months, making it more unlikely that it will cut borrowing costs soon.

Mr Soros warns Britain is facing its worst economic storm in living memory, dwarfing those of the 1970s and early 1990s, with a housing slump and serious recession.

He said: "The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn't have in the 1970s."

The warning undermines predictions that Britain will suffer only a brief and relatively painless recession, unlike the precipitous dives of previous years.

Mr Soros also warned that the Bank's inflation report represents a "Faustian pact", obliging it to keep interest rates high to control inflation, even as the economy is starting to slump.

"You had the nice decade," he said. "Now that is over and you are in a straitjacket."

 

[Runum]

There were lot's of stories about the Intercontinental Exchange(ICE) and Commodities Futures Trading Commission this week. Some of the articles speak of congressional investigations of possible trading violations. Apparently the investigations have been going on for 6 months. My sources:

http://money.cnn.com/2008/05/30/news/economy/oil_cftc/index.htm?postversion=2008053016

http://www.star-telegram.com/ed_wallace/story/651928.html

http://www.star-telegram.com/ed_wallace/story/659081.html

http://www.thestar.com/Business/article/433611

Anyway, I don't like paying almost $4.00 per gallon of gas as much as anyone else. However, I also don't like to hear about congressional investigations and new legislation concerning investors and investments. So, is this run almost at an end either economically or legislatively? Does our legislature have enough power to affect a world trading market?

Sorry if I sound elementary, I know I'm out of my comfort zone of REI. Just trying to learn...

 

[TheGreatBear]

Speculation driving prices higher might be true, but Congress does investigations just to soothe the angry masses imo. In the end probably nothing will be done/no substantial changes. Cuz the truth is, they can't do anything about it.
I read a headline that said "some analysts compare oil to dotcom bubble"... which is amusing. Oil's supply/demand situation is pretty tight, unlike dotbombs which had no viable business model.

 

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[Runum]

Speculation driving prices higher might be true, but Congress does investigations just to soothe the angry masses imo. In the end probably nothing will be done/no substantial changes. Cuz the truth is, they can't do anything about it.
I read a headline that said "some analysts compare oil to dotcom bubble"... which is amusing. Oil's supply/demand situation is pretty tight, unlike dotbombs which had no viable business model.

Good observation. ++speed

 

[Runum]

You traders may want to check this out.

http://www.insideautomotive.com/documents/ChrisCookIce.pdf

 

[randallg99]

the prices are ultimately determined by the market forces of supply vs. demand at work.... while futures are potentially artificially inflated, the fact that many countries/companies are buying them is a reality and if it weren't for this very point, then I would agree with all of the conspiracies floating around.

let me reiterate: people are indeed paying these prices and until this demand slows, prices will remain at these levels.... perhaps we will see $100/bbl as the parabolic movement would indicate a natural retracement. Only way we go way down below $90 is a serious blow to the economy on a global level.

lastly, the bumbling idjits on CNBC need to realize that oil is not "crashing" when it slipped into the 120's....

 

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[dreb]

History is littered with so called bubbles - but what really is a bubble?? Is this just another term we use to explain the unexplainable?

Just look at the last 15 years and how quickly small rises that can be explained by true supply/demand relationships get blown out to unthinkable levels. But why, this is the information age, we all want to make money and many fail to understand how. The biggest problem is the media, they publish story after story on the shock that is the price and how much money people are making. Then only one thing can happen, everyone else wants a piece of the pie so they jump. For how long - well the smart people are already investing their money in the next big area and soon the money will begin flooding in. Unless the markets can become rational - I don't think so. But judging on the bubbles of the past, we are about half way through it.


-------------------------
http://www.smartmillionairesguide.com

 

[randallg99]

as long as US$ stays weak, oil will remain at these levels, if not higher.

I just fear that we will enter a coal and NG bubble.... that could really put one of the final nails in the USA's economy. (coal is already shooting to the moon)

 

[Bilgefisher]

Interesting article by Forbes on the subject
http://www.forbes.com/forbes/2008/0616/031.html

 

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[Woody]

Now I am no avid investor but I do watch the market almost everyday. I have been thinking about oil because it is financially draining many people.

Here is my idea:
The traders are buying and selling on margin, correct? They are driving the prices up and down trying to make a buck. They are buying mostly on credit. The speculation, in my opinion, is at least 50-60% of the total price per barrel. I am pretty sure the margin requirement is 70%. So what if we raised the margin requirement, only in the oil sector, to 100%? This would essentially be a cash account. Right now there is supply and demand + SPECULATION, but if the margin was 100% it would only be supply and demand.

I think this would drastically lower the price, lower speculation, and stop the bulls and bears from altering the price.

Maybe my idea is crazy and will not work:coco:, I am still new to the concept of trading. Will some of you more seasoned investors C&C my idea?

Thanks guys,

-Woody


EDIT- After saying that, if it is not obvious, I do think oil is in a bubble.

 

[Edge]

Now I am no avid investor but I do watch the market almost everyday. I have been thinking about oil because it is financially draining many people.

Here is my idea:
The traders are buying and selling on margin, correct? They are driving the prices up and down trying to make a buck. They are buying mostly on credit. The speculation, in my opinion, is at least 50-60% of the total price per barrel. I am pretty sure the margin requirement is 70%. So what if we raised the margin requirement, only in the oil sector, to 100%? This would essentially be a cash account. Right now there is supply and demand + SPECULATION, but if the margin was 100% it would only be supply and demand.

I think this would drastically lower the price, lower speculation, and stop the bulls and bears from altering the price.

Maybe my idea is crazy and will not work:coco:, I am still new to the concept of trading. Will some of you more seasoned investors C&C my idea?

Thanks guys,

-Woody


EDIT- After saying that, if it is not obvious, I do think oil is in a bubble.

I don't know, that isn't a commodity specific argument. Same claim could be made for RE, biz, and other paper assets.

You might also ask, "would the house down the street be selling for $500k if the buyer wasn't using any financing?"

Would the PDQ service company downtown be selling for $1.5M or any other multiple of cash flow if the buyer coudn't use any financing?

How about, "should stock XYZ be trading at 50 X next year's earnings?"

The supply and demand + speculation argument could be made for all of these.

I'm not sure the difference between the word speculation and investing, to me they are the same in a capitalistic economy. I don't think it matters if you are buying an asset as a secure investment, risky investment, or hedge, there is a degree of speculation in your decision to purchase.

 

[Analyzer]

Never really looked into this issue but I guess the way to determine wether we are in a bubble would be to size up current stocks (being held by states, speculators, companies, etc.) of oil vs daily output.

If they are very different then we might be in a bubble (and people are buying oil guessing price will go up).

If, on the other hand, stocks are relatively small vs daily production I would guess current price isn't a real bubble but simply the point (i.e. price) where demand and offer met.

 

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[randallg99]

I don't get it...

Saud says it's gonna pump more while US usage declines but the price keeps going up?!?!

I really believe we've peaked oil production.... apparently Saud's increase in production is for heavy crude, not the light sweet ...

 

[randallg99]

I know a lot of you love it when I bring good news to this forum....

would any of you believe that speculators have been on the short side of the oil trade????

if true, we will see more hedge funds blow up and the short squeeze will send it to atmospheric levels... (as if 140/bbl isnt already in nosebleed levels)