Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21
Ultimate Gaming and Home Working PC System Build 2021 - 5950X, RTX 3080, Asus MB - Scan Computers UK - 7th Jan 21
Inflation the bug-bear looking forward through 2021 - 7th Jan 21
ESG ETF Investing Flows Drive Clean Energy to Fresh Highs - 7th Jan 21
5 Financial Market Surprises in 2021 - 7th Jan 21
Time to ‘Reset’ Your Investment Portfolio in 2021? - 7th Jan 21
Bitcoin Price Collapses almost 20% at the start 2021 - 7th Jan 21
Fed Taper Nervous Breakdown - 6th Jan 21
What Will the U.S. Dollar Ring in for 2021? - 6th Jan 21
Stock market frenzy- Ride the bandwagon but be sure to take along some gold coins - 6th Jan 21
Overclockers UK Custom Build Gaming System Review Heat Test and Final Conclusion - 6th Jan 21
Precious Metals Resuming Bull Market, Gold, Silver, GDX Trend Forecasts 2021 - 5th Jan 21
Trump’s Iran-COVID-Gate Anniversary  - 5th Jan 21
2021 May Be A Good Year For The Cannabis / Marijuana Sector - 5th Jan 21
Stock Market Approaching an Important Target - 5th Jan 21
Consumer Prices Are Not Reflecting Higher Inflation; Neither Is The CRB - 5th Jan 21
NEW UK Coronavirus PANIC FULL Lockdown Imminent, All Schools to Close! GCSE Exams Cancelled! - 4th Jan 21
The Year the World Fell Down the Rabbit Hole - 4th Jan 21
A Year Like No Other for Precious Metals… and Everything Else - 4th Jan 21
The Stocks Bull Market is Only Half Completed - 4th Jan 21
An In- Depth Look At Gold Price Trend - 4th Jan 21
Building America Back After a Dark Covid Winter - 4th Jan 21
America's Dark Covid Winter Ahead - 4th Jan 21
Buy a Landrover Discovery Sport in 2021? 3 Year Driving Review - 3rd Jan 21
Stock Market Major Peak in Early April 2021 - 3rd Jan 21
Travel and Holidays 2021 - Flight Knight Cabin Bag Review - 3rd Jan 21
�� Happy New Year 2021 Fireworks and Drone Light Show from London and Sheffied - BBC�� - 2nd Jan 2
The Next IMMINENT Global Catastrophe After Coronavirus - 1st Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Crude Oil Deflationary Bear Market

Commodities / Crude Oil Mar 11, 2009 - 01:17 AM GMT

By: Kyle_L_Lucas

Commodities

Best Financial Markets Analysis ArticleYesterday on the blog I posted an email my sister sent me. ( Click here to read her note .) She asked me about the Oil market and its relation to the real estate market in the town she lives in.

As long time readers Know, I have been pretty bearish on Oil since last Summer. And now, even with the huge decline in prices I am still not bullish, though I respect the possibility of a good suckers' rally before the next wave of price destruction ensues. I will get into the pricing aspect in a bit.


My sister asks me to explain Oil speculation. Since she is a paying subscriber to the Letter like the rest of you, I'll do my best to spell it out.

•  Crude Oil started to go up some years ago because of a structural lack of investment in production. This lack of investment stemmed from an extended period of low prices in the 1990s. That period of low prices stemmed from a previous period (70s and 80s) in which the price of the commodity traded at an elevated level. High prices led to over-production which led to low prices which led to under-production which led to renewed high prices which led to renewed over-production, which led to where we are today. This process is what they call ' Cyclicality '.

•  Superimposed on this commodity-specific cyclicality are broad monetary and geopolitical trends. Credit expansions and contractions; wars and peaces. Stuff like that.

•  But why did Oil go up to like $150 last year? One word: Speculation . Speculation that under-production of the commodity was somehow a law of nature; speculation that credit expansion was a permanent reality; speculation that this all-purpose-perpetual-war would someday somehow cut off the supply of Oil to the world.

But I am not just talking about the speculation of the Speculator. The dudes like us who buy and sell futures contracts and other securities with the intent to profit from price fluctuations. Included in the ranks of speculators are the producers of the commodity. How adept the Arabians were in their bull operations the last few years! In the first half of this decade a humorous string of pseudoscience started to circulate in environmental and investment cliques. 'Peak Oil'. * So the Arabians thought, why not lead these gullible Westerners to believe there is something valid in their silly science? So they temporarily curtailed production growth, and so grew the Oil bubble. Prices reached a point where they could forward sell production years into the future at ridiculously high prices. And about the same time the Arabians suddenly 'discover' that they can expand production by a good 10 or 20 percent.

Meanwhile production was being expanded everywhere else in the world too. So much Crude Oil was produced the last few years that there developed a shortage of places to store the commodity. So the last several months the market has been trying to work off all this excess inventory. This shortage of storage led to the huge contango on the futures market (meaning forward prices are higher than spot or near-month prices).

So what is the state of the Oil market now? Well, the contango has started to narrow. That's a good sign. But on the other hand production and exploration don't seem to have been curtailed so much yet. How many Oil producers or drillers have you heard go out of business recently? If Oil was indeed a bubble, then you would think there would be some bankruptcies to accompany its deflation. A few minor players have filed for protection the last few months, but no huge multi-multi-billion Dollar concerns.

The US rig count has come down sharply from the peak last year, as you can see on the chart below. But those figures are mostly Natural Gas rigs and not Oil, so I'm not sure what the 'right' number should be. The international rig count has decline somewhat too, but I still see it as being pretty elevated. It looks like the growth trend has been broken, but for me to believe that Oil is truly under-


I would like to see a serious decline in that count. Closer to 800 sounds about right.

My sister's husband works in the Oil Services business. When the question about Oil investments have come up in our conversations the last couple years I've told them that 'the time to invest in Oil is when he [sister's husband] loses his job.'

It's a good job he has, so I really hope that doesn't happen. In fact, it is for this reason that I really hope I am wrong about my outlook for the Energy Sector.

I haven't looked at my sister's prospective real estate purchase closely enough to Know how good a deal it is. My hunch is that a house purchase now in that area will work out fine, at least when viewed from a multi-year perspective. With any luck that new housing project she mentions will fall through. With the credit markets the way they are, combined with the uncertainty about Oil and Gas prices, the failure of this proposed ' Black Gold Village ' becomes a distinct possibility. I mean really, can we believe the Über-Bubble has fully deflated when a development with such a silly name is still in the works? Just sayin'....

And now let's take a closer look at the architecture of the Oil market. Below I include a longer-term chart of the December 2009 WTI Nymex contract. From January 2007 to July 2008 the price rose by about $89. We can consider that move the final wave of the bubble. If we combine the dimensions of Time and Price, we might expect the deflationary side of the bubble to at least be of similar 'size'


to the last inflationary portion of the bubble. I'm going to take a wild guess here and say that the ultimate amount of price deflation will be approximately 132.472 percent of the $89 inflation. That would put the December contract down to around $29. But when? What if the total deflation lasts about 75.49 percent as long as the previous 77 week inflationary period? That would place the bottom around the end of August or beginning of September 2009.

That actually fits into my macro-outlook pretty well, though the reader should realise by now that I am better with price projections than I am with timing. Hopefully applying the Theory of Proportion to the dimension of Time will lead to some improvement on that front, but we shall see.

Maybe my sister should wait to buy a house until the end of the Summer then? She has been wanting to buy property for four or five years now and every time she mentioned the idea to me I shot it down. This never made for very fun family conversations, but I think she realises now that while it sounded like I was being an asshole, I was actually just being an economist.

But this time I'm not so anxious to talk her out of it. If this doesn't turn out to be the best time to make such a move, it could still be a 'good enough' time to do it. Waiting till later in the year might be better, but then there is the risk that house won't be around then.

As an aside, I'm looking at this chart of Hess (HES) share prices and it looks fairly questionable at the moment. I see no reason why it couldn't fall back and test last December's low.

With a forward P/E estimate of 15, a hair cut of 1/3 the current rate seems plausible. And that would fit with the price objective in the event that the share price closes below that neckline above 49. And look at that CMF indicator!

Yeah, enough words for today. We'll do it again tomorrow. Have a good morning.

Regards,

* I Know most of my readers actually think there is some truth to 'Peak Oil'. I hope I don't insult anyone too badly. Oh, but if it makes you feel better, I don't believe in 'A.I.D.S.' or 'Global Warming' either.

By Kyle Ledbetter Lucas

trendandvalue@gmail.com

http://trendandvalue.blogspot.com/

Lucas is something of a philosopher with a knack for financial markets forecasting. He publishes the Trend & Value weblog and the new Trend & Value Letter, an investment newsletter published five mornings a week. Formerly a Precious Metals Broker, Lucas now lives in Quito, Ecuador.

Copyright © 2009 Kyle Ledbetter Lucas - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Lucas
12 Mar 09, 18:45
follow up published

my response to a reader's comments:

http://trendandvalue.blogspot.com/2009/03/crude-oil-bull-clique-returns.html


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules