Commentary - Oil, Oil, Oil !!!
The hottest topic in the investment world today is commodities, and more specifically oil. I have never started a day in the past month without listening to or reading about some talking-heads opinionating about the direction of the oil market. On March 31, one of those talking heads from Goldman Sachs, Arjun Murti wrote a report and predicted that oil price will "super-spike" to $105 in not too distant future. Conspiracy theorists quickly jumped and accused no less than the CEO of the company, Hank Paulson for trying to pump up the oil price to benefit its prop traders. Paulson naturally denied those charges but that hasn't convinced the naysayers. We all know that Goldman is the best player in the world in making money from its prop-trading but nobody knows exactly how it does it - the usual suspicion being that it screws up its clients.
Just yesterday, another talking head, Jim Roger, previously, I meant in the 70s and the 80s, with George Soros, was on Bloomberg downplaying the super-spike story. He argued that when people start talking about oil price hitting $105, it's time to sell - much like when Henry Bloget predicted, which turned out to be true briefly, that Amazon would hit $400. I think Jim is right. Instead Jim suggests investing in, guess what, sugarcane plantations because sugar inventories are low. Jim has been a commodity bull since the early 1990s and his prediction didn't come to fruition until 2002, so I'll take his sugarcane plantation advice with caution.
What's my view on oil? I don't have a particularly strong view but I don't believe that oil price will hit 3-digit. I think it will stay above $40 for sometime (say 12-18 months) but there will be lots of volatility in the meantime. If I were trading, I would trade oil vol i.e. derivatives and not oil. My reasons, (1) oil demand will remain strong. Global industrial cycle is continuing because growth in China, contrary to prediction, is not slowing down. When China eventually slows down, hopefully Japan and Europe will make up for the slack. (2) Supply condition is tight and will remain so until Russia starts to rapidly increase its production. That's not going to happen until Putin starts to win confidence of foreign and domestic investors. (3) Technically speaking, there are strong resistances at $42 and $38; so $40 has double protection. (4) Consumers, especially in the US will start consuming less if oil price continues at >$60. That's not good for oil producers. The last thing the autocrats ruling the OPEC countries need is developed countries, I meant the USA, encouraging their citizens to conserve oil. Those autocrats have been able to hold on to power by bribing their population with petro-dollars.
Just yesterday, another talking head, Jim Roger, previously, I meant in the 70s and the 80s, with George Soros, was on Bloomberg downplaying the super-spike story. He argued that when people start talking about oil price hitting $105, it's time to sell - much like when Henry Bloget predicted, which turned out to be true briefly, that Amazon would hit $400. I think Jim is right. Instead Jim suggests investing in, guess what, sugarcane plantations because sugar inventories are low. Jim has been a commodity bull since the early 1990s and his prediction didn't come to fruition until 2002, so I'll take his sugarcane plantation advice with caution.
What's my view on oil? I don't have a particularly strong view but I don't believe that oil price will hit 3-digit. I think it will stay above $40 for sometime (say 12-18 months) but there will be lots of volatility in the meantime. If I were trading, I would trade oil vol i.e. derivatives and not oil. My reasons, (1) oil demand will remain strong. Global industrial cycle is continuing because growth in China, contrary to prediction, is not slowing down. When China eventually slows down, hopefully Japan and Europe will make up for the slack. (2) Supply condition is tight and will remain so until Russia starts to rapidly increase its production. That's not going to happen until Putin starts to win confidence of foreign and domestic investors. (3) Technically speaking, there are strong resistances at $42 and $38; so $40 has double protection. (4) Consumers, especially in the US will start consuming less if oil price continues at >$60. That's not good for oil producers. The last thing the autocrats ruling the OPEC countries need is developed countries, I meant the USA, encouraging their citizens to conserve oil. Those autocrats have been able to hold on to power by bribing their population with petro-dollars.
posted by The Poster | 3:04 PM
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