Metals are moving back up, too; usually flat to drifting down this time of year.
Oil: the contrarian bearish scene
Khaleej Times - 19/06/2005
Gulf Money by Matein Khaild
An act of God can rewrite the rules of the game in the global financial markets. The great Kobe earthquake in Japan proved the kiss of death for Nick Leeson's Nikkei Dow futures positions on Barings in 1996.
The 7.9 Richter earthquake last week in Chile triggered a classic, hedge fund driven short squeeze on copper on the London Metal Exchange and New York's COMEX. The Chilean earthquake also made a mockery of my call to short copper last week and, just as I claim credit for my (admittedly often spectacular) successful market calls, I am now publicly exposed as the "Dumbo of the Week".
I was dead wrong on copper for now. Yet I totally stand by my conviction that the copper bubble is going to go bust in the coming three months -and world copper prices will tank. Sure, talk is cheap and who needs to listen to the ''Dumbo of the Week'' pontificate on copper, when I was so wrong last week? But do consider the fact that while LME warehouse inventories are tight, record mining output means surplus supply for the first time in two years.
The stock on the LME, COMEX and Shanghai is 80,000 tonnes but the world's leading copper producers and consumers now hold 800,000 tonnes, ten times the warehouse inventories. This is the classic SOS for the coming copper crash, When that happens, the Dumbo of the Week will be vindicated with a vengeance - and those who short copper and PD on the Big Board a whole lot richer.
The Opec quota increase was just symbolic as its President Shaikh Ahmed Al Sabah of Kuwait admitted in Vienna. Opec is producing at full capacity at 28 million barrels daily. The real chokepoint in the global energy market is a chronic shortage of refining capacity. Something is dangerously wrong in the world where a terrorist bomb threat in Nigeria, a pipeline explosion in Iraq, a Kremlin - oligarch feud, a Chavezista threat in Venezuela or a hurricane in the Gulf of Mexico can trigger a full blown panic in the oil market. This is exactly what happened last week when the US consulate in Lagos shut down on a terrorist throat and crude oil went ballistic on the London and New York futures exchanges.
The heating oil and gasoline supply squeeze boosted crude oil and even Saudi Arabia can only pump sour (high sulphur) crude where spare refinery capacity is just not there. The trend is your friend is a sacrosanct adage in the futures markets and I was forced to go long crude (on West Texas Intermediate futures contracts on NYMEX) last week. But, ''Dumbo of the Week'' happens to be an instinctive contrarian in my cerebral processing of conventional wisdom. What is really going on in the oil market ? What is endgame of the oil bubble?
I am lucky to know and regularly exchange ideas with two of the worlds leading private crude oil and oil shares traders in Geneva and New York, both Wharton classmates and dear friends. Before you brand me Dumbo of the Decade, hear me out. Our ideas might help you make a fortune in the world financial markets if we are right.
Guess what? Chinese oil imports declined in the first six months of 2005 while US inventories shot higher. Hello. Oil prices are near $60 but real demand for crude is weakening? A paradox, sure. Why? Hedge fund speculation in oil futures has gone ballistic. What is the inevitable endgame of speculative frenzies - in stocks, real state, commodities futures? A total market collapse. The crash in crude oil is, I believe, months away.
The oil bubble was triggered by speculators and hedge funds, who loaded up on "paper oil" futures contracts on the LME and the NYMEX. Yet hedge funds run with the trend and, as Chinese imports drop, crude oil will lose its fundamental moorings. Hedge fund liquidation will then take over. The Americans have taken the world for a ride again with their hype about an energy shortage that simply does not exist.
The Chinese, the Indians and the Asian importers have invested hundred of billions of dollars in buying energy assets (including wildly inflated offshore blocks in Angola, Sudan, Vietnam and Burma). Meanwhile, production from LNG ,tar sands, coal liquification is soaring up. These alternative energy sources substitute crude oil at $18/barrel.
As Chinese demand weakens, the GDP boom-bust in the Middle Kingdom has begun. So do not believe me? Chart the Baltic Exchange shipping dry cargo index. Yessir, wave your Mao hats in panic as this is the heartbeat of the global economy and it is down 40% in 2005. China triggered the global oil boom and China will be the trigger for a protracted oil bear market.
Oil exploration and LNG, oil sands, coat etc. have all shifted the energy supply curve permanently to the right, exactly as happened after the 1970's oil boom. Interest rates (in dollars) are bound to rise higher as the Federal Reserve hikes the overnight borrowing rate. Note that the smart money on Wall Street does not believe the $60 oil hype. Why else are the shares of Chevron and BP, Exxon or Total, priced at $30 crude?
As Chinese and global crude imports drop, as US inventories rise, as Saudi Arabia and Kuwait boost production, the hedge funds will bail out en masse. As the chilling realities of a supply glut and weak demand grips Wall Street, the oil market will go into a panic. Remember, leverage and speculative manias cut both ways. My call? A bear market in crude oil and North Sea Brent trades below $20,
Conventional wisdom states that George Bush wants "regime change" in Iran to neutralise its nuclear program or liberate its people from theocratic rule. I disagree. The real American motivation for regime change in Iran is access to the worlds most lucrative and underdeveloped oil resources. Iran alone can boost its production from 4 to 7 million barrels by 2008 and gift the West cheap oil for a generation.
Yet that cannot happen without hundreds of billions in investment that America will not allow as long as the Ayatollahs remain in power. The Iranians have also angered the White House with their $100 billion oil and gas deals with China and India.
The gas pipeline via Pakistan ,not Kashmir or Iraq, was the real reason why Condi visited New Dehli.
The pipeline will not happen because Uncle Sam is not amused.
The mullahs of Iran hold the key to America's total dominance of Middle East oil. Expect another Bush oil war in the Gulf.
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