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Oil's Impossible
Moon Shoot: How High Can We Go? |
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Here in the good old USA,
the price of oil is making it rough on all of us. Not only are prices north
of $4 per gallon at the pump, but the ripple effect throughout the
entire economy is causing skyrocketing prices in other consumables as well.
The one-two punch of much higher prices for everything oil related, coupled
with very depressed residential real estate, has Americans keeping a tight
hold on their wallets. Money is not moving around, which results in lower
incomes and less economic activity. In some sectors of the economy it's
not a recession- it's a full blown 30's like depression.
I don't know anyone who was predicting
$135 per barrel oil one year ago. Considering the following eye opening
stats:
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Oil was about $85 at the beginning of
the year
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On average since January, oil has risen
$.50 per trading day
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With about 21 trading days a month,
the rise equates to $10.50 per month in price appreciation.
Is that sustainable? Not likely. Nothing
goes up that dramatically forever. So- how high is oil going? Instead of
living the media driven drama, let's wipe our goggles and review some facts.
Here's the real story behind the supply/demand dynamic:
Here are the factual estimates. Globally,
the world consumes about 87 million barrels per day. About
89
million are produced. In 2000, the world consumed about 70 million
barrels per day. Very little of the 17 million extra barrels have come
from US demand- it's pretty much all global. In fact, consumption in the
US is down about 9% this year.
Here in the US we consume about 20
million barrels daily. We gobble up nearly 25% of the world's oil
supply every day.
The supply/demand dynamic is a bit
thin right now. Any supply perceived supply disruption sends prices higher.
There isn't much of a margin for error in global supplies these days. Globally,
demand is forecast to increase 30% by the year 2030- this would equate
to 115 million barrels per day.
In fact, the price of oil is so high
that even the Saudis were trying to jawbone down prices last week by reporting
a 1/2 million barrel increase in production per day, and stating they felt
oil should not be any higher than $85. They understand that recessions
aren't good for their US investment portfolios.
Any minimal perceived supply disruptionsends
the price of oil careening up the charts. Analyst calls are helping push
prices higher. There is no doubt the momentum of higher prices has capital
chasing higher prices because they are going higher. The pundits have declared
oil will be $150 by the 4th of July- so the market is gunning for that
level.
How much of $135 per barrel
oil if driven my more buyers than sellers, rather than more consumption
than production? In my view, a great deal. We do produce about 2 million
more barrels daily than we consume on a global basis.
So, how high are we going before
a meaningful correction? Answer- I don't know. The top of a parabolic rise
is completely unpredictable. I know the current rate of rise in oil prices
is unsustainable.
Soothsayers of the past have been
unsuccessful predicting tops in parabolic rises. Consider the statement
of one of the smartest guys I can recall in my lifetime- Alan Greenspan-
the last FED Chairman, described the prices of stocks during the tech boom
in the 1990's as "Irrationally Exuberant" - that was in December
of 1996. At the time, the NASDAQ Comp was at 1300- it peaked in March of
2000 at 5,000. That statement was made, and the market powered 284%
higher before the bubble burst.
So- here's today's message. This
parabolic rise in the price of oil is unsustainable. It is a bubble, and
it will burst at some point. Trying to predict when it will burst is a
fool's errand and will leave you with egg on your face and an empty wallet
if caution is not used. Oil will keep going up until it stops going up.
However, this bubble will burst and saner pricing will prevail.
One of the smartest commodity guys
I know believes the best cure for high prices is high prices.
High prices always equate to diminishing demand, which equates to lower
prices down the road. Why do you think the Saudis are trying help get runaway
oil back under control? They want us to remain dependent. They don't like
alternative energy sources.
If I had to guess- Everyone's calling
for $150- so it will probably go to $148 to $149 and
collapse. I'll bet oil stabilizes in the $100 to $120 range, which
will be interesting for the stock market. Iit's just a guess based on money
years of observing "Irrational Exuberance". Long oil is a very crowded
trade. When the crowd leaves, it will leave in a hurry.
On the subject of oil- I haven't
delivered any microcap ideas in the oil and gas space since we all did
pretty darn well in Hyperdamics (AMEX: HDY) a couple of years ago.
The problem- I've looked at a few,
but always felt I was behind the curve on the price. It has always run
up too quickly for my taste.
I was planning on sticking with the
larger cap short term trading ideas through the summer, at which time I
have a couple of blockbuster new ideas coming your way in the alternative
energy arena.
However, this past week I was introduced
to an irresistible oil and gas idea, which I believe I will introduce towards
the end of next week. Ten months ago this stock had run up rather prolifically
on promise.
The company is about to start delivering
very significant cash flows from domestic oil and gas production, and is
trading at less than 1/5th of the former high. It's at a multi year low.
This is my kind of entry level. Subject to a little more due diligence
early next week, look for this new idea a little later in the week.
It's 10 cent'er. Get ready for a
little fun. Perhaps I can come up with a way to repatriot some of the money
you are spending filling up your tank by finding a profitable idea.
If you are interested in an idea
like this, just send an email to editor@otcjournal.com.
If there's interest, I'll publish on the idea after I really nail down
the facts.
Home Page : www.otcjournal.com
Email Questions or Comments To:
editor@otcjournal.com
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