********** Oil Market Mythology **********
Time for another "Reality Check" in the Oil Sector:
Singapore is refusing tanker loads of Oil Product, Europe is at a 10 year high in Jet Fuel Inventories, US Inventory Supply Levels are above 5 year Inventory Average Levels - for both Natural Gas and Crude Oil.
OPEC just set a record for output (Matt Simmons et al - said this could not happen) and today announces - they have no market for additional Oil Production and are going to cut back production in Q3 & Q4 this year by 150,000 bpd and for 2006 by 1 Million bpd !?!?!
...this flies directly into the face of the Matt Simmons-Peak Oil Spin Doctoring that present bloated Oil Inventories should be ignored - because we are going to have a 2nd half of 2005 Demand/Supply shortage that will "shock" the Oil Markets.
The cure for High Oil Prices has always been - High Oil Prices...and as simplistic as that sounds, it has always been true, is true today and looks as if it should hold true for at least another 20 years.
Daniel Yergin one of the most respected names in Oil (author of "The Prize") from Cambridge Energy Research and who is NOT an Oil "Investment Banker" - has just released a study which also flies into the face of the Peak Oil-Crisis Cassandra's :
cera.com
["CAMBRIDGE, Mass., June 21, 2005 – Despite current fears that oil will soon “run out,” global oil production capacity is actually set to increase dramatically over the rest of this decade, according to a new report by Cambridge Energy Research Associates (CERA). As a result, supply could exceed demand by as much as 6 to 7.5 million barrels per day (mbd) later in the decade, a marked contrast to the razor-sharp balance between strong demand growth and tight supply that is currently reflected in high oil prices hovering around $60 a barrel.
In a rigorous new field-by-field, bottom-up analysis of the world’s capability to produce hydrocarbon liquids, Worldwide Liquids Capacity Outlook To 2010— Tight Supply Or Excess Of Riches, CERA indicates that worldwide capacity could rise by as much as 16 mbd between 2004 and 2010 -- a 20 percent increase over the period. "]
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I will repeat what I have said all along...often as a lone singular voice:
PEAK OIL and all of this Oil Crisis-New Paradigm Hype & Spin Doctoring that we've had recirculated for the last 2-3 Oil & Gas cycles is simply a "Perfect-Storm, Marriage of Opportunity" between - ECONOMICS & POLITIC's.
A not uncommon cyclical lack of Energy Infrastructure Investment over the prior decade (Low Industry Cap Ex & lack of reinvestment in refining capacity etc) which occured simultaneous to China's "unsustainable" (*keyword there) and unexpected surge in their Energy demand in their race to showcase the "New China" for the 2008 Beijing Olympic's exacerbated the prior lack of Investment in expanding the present Global Energy Base.
Their exists significant increases in Oil AND alternative Energy & New, Emerging Technology Energy Production Capacity in the Global Marketplace, but there is always a time lag from initial demand surge to marketplace supply response - as there is not simply a magic "spiggot" that can be opened, or closed at will.
This very normal time lag in responding to demand surges (as well as cyclical collapses in demand) creates normal Oil Price cyclical volatility.
In this cycle - that time lag and very normal, cyclical price volatility have been exploited for Political and Economic "gain" at unprecedented levels.
re:
- rising Oil Prices lead to a Tax Windfall for the USA and rising Oil & Gasoline Prices are also doing much of the work at cooling the US Economy for the Fed that higher Interest Rates would otherwise be required to do.
- the parabolic increase in Oil Prices also gives OPEC & the Saudi's a huge windfall which allows OPEC Petrodollars to be recirculated back thru (not so) mysterious Carribean Offshore Entity's to fund the US Deficit and mask TIC reality.
- follow the money re:
Money fuels all Politics and Oil Money quite obviously fuels the Bush/Cheney Oil/Defense Contractor Machine and their idealogue based control of Global Oil Supplies vis a vis the emerging China Geopolitical/Economic Threat.
There is an old saying in the 'patch that says:
"It's the Price of Oil - Stupid"
... and often that old tome - rings true.
In my opinion, the more profitable tome is -
"The Oilpatch is, was and will always be - CYCLICAL - Stupid"
It is the volatility inherent in Cyclicals that attracts Traders.
In cyclicals we get incredibly cheap fundamental valuation entry opps at the bottom of the cycle (such as the OSX 40's to 60 in 1998)....and the stocks conversely get the benefit of rather rich and often speculative valuations at cyclical tops - where many of the subsectors see PE's similar to Tech-stocks, if not merely Peak-Cycle multiples of cfps, or the upper PE ranges for the particular subsector.
It doesn't require a high degree of analysis, or Sector knowledge to know what drives Oilpatch Cycles Upward...and "making" money in the up-cycle of the Oilpatch has never really been that difficult.
Where the difficulty lies - is in "keeping" what you've made...and in the analysis and the knowledge of what causes, or will cause, the when, not if - eventuality of the downward slope of the Cycle.
The concept of balancing "Risk to Reward" is a concept that all good Energy Traders should have at the forefront of their trading focus.
As Cycles mature, as sentiment peaks, as the new-paradigm, or the "this time it's different" mantra's begin to become accepted as "manna"... it's usually a signal for Cyclical Traders to re-check the "Risk" side of the Risk:Reward Equation....and to start focusing on how to "keep" what they've already made, or still hope to make...
Big Money is not going to be made at $55-$65 Oil.
- that money, has already been made & should aleady be in savvy Oil Traders pockets.
Big Money is going to be made at $35-$45 Oil, or at $85-$105 Oil.
The "bet" seemingly is on whether Oil goes to $35 - $45, or to $85 - $105.
... or is it !?!?!?
That Question is imho, best answered via asking another Question:
Where are we in this Cycle on a Risk:Reward, Valuation & Sentiment Basis... with "risk:reward" being the primary focus ?
On a "Risk:Reward" basis... is picking between the two options really THE smart trade & bet ?
...or is there another choice ?
In my opinion there is - another choice.
"Volatility"
My take on the Oilpatch of late has been misinterpreted and/or misunderstood...which is not unusual in a Peak Environment of See, Hear and Speak - no (Oil) Evil - Permabullian Sentiment.
The January to March parabolic move in Energy stocks this spring was a profit taking and/or short-sided Trading Opp for Energy Traders.
I went short and took what the market gave me, got my $10-$15 in stocks like BRY & ATW and I then covered my shorts and then instituted what I believe is the best "present" Risk:Reward way to trade the remainder of this Oil Cycle - an Options Straddle.
Volatility is the "trade" here in the Oil & Gas Sector.
... not the China Boom, not Peak Oil, not a Global Economic Crisis-Shock of Biblical Proportions (not that one can not be created via the mismanagement of the use of Oil as a China Economic & Geopolitical "WMD")... just simply - "VOLATILITY."
The smartest way to trade volatility is to position oneself to be able to make money in either direction.
And the best way to do that without having to perfectly time the ebbs & flows of interim sector moves is via an Options Straddle.
The "Straddle" is the pureplay on volatility.
My personal trading bias - is on the Short side, as I think that Oil is not trading "freely" - ie: the China/Economic WMD Geopolitical use of Oil & the Oil Markets being used to slow China's growth and to strong-arm Currency re-valuations, Trade & Geopolitical concessions from China.
I belive that Oil Prices (and Nat Gas Prices that have piggybacked Oil Prices) are fundamentally, much over-priced.
But... just as savvy Tech & Internet Traders during the Nasdaq Bubble at Naz-3500 also felt that the Tech/Internet/Telecom Bubble was just that - a bubble.... one that would eventually collapse... the "key" for Traders is also in knowing and acknowledging that market forces can and will take irrational exhuberances higher, for longer periods of times than reality may otherwise suggest...
Those that can unemotionally identify the always changing & dynamic balance in the market between the changing reality of the underlying fundamentals as oppossed to the dynamics of sentiment and momenteum...can still make money in high risk:high reward environments in mature phases of cyclical, cycles.
No market....especially Cyclicals and especially the Oil Sector - is static.
Accordingly, no trading strategy within the Oilpatch can EVER afford to remain - static.
Dynamism is King.
Volatility is the oxygen of dynamism.
Trade and Profit from the dynamic volatility in this phase of the Oil Sector.
Rewards may still be high in the Oilpatch...but, RISK has no risen to PEAK levels.
The Big & Easy Money has already been made.
Big Money can still be made.
...but, not "EASY" Money.
RISK has risen...and risk eliminates "easy."
Personally, I strongly believe that the next "easy" money is going to be made on the downside and at some point in the future it is going to be realitively - easy, as well.
For now... it's not "easy" - so play what is:
VOLATILITY.
...consider the Straddle and the benefits of Options.
Define & quantify your downside, but maintain leverage to the upside - IN BOTH DIRECTIONS.
Pigs get Fat, but Hogs get Slaughtered...and remember there's always one helluva HOG ROAST at the end of every Oil Cycle.
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