The Positive and Negative of High Oil Prices

Probably the most devastating personal impact if oil goes over $100 is that there won’t be a beer fund for people who stop by and see me in Aberdeen. Therefore, if you come see me you will have to pick up the tab.

But a MarketWatch story today highlighted that energy stocks were tracking oil prices, which is why I am hedged against rising oil prices:

Energy stocks rise along with oil prices

NEW YORK (MarketWatch) — Energy stocks moved up Monday along with the overall market after oil futures broke through $93 a barrel for the first time on jitters over a production cut in Mexico on bad weather. Oil futures rose $1 to $92.86 after breaking through $93 for the first time earlier in the day.

For me, that’s mixed news. On the positive side, higher oil prices mean that people will conserve more energy. That is first and foremost, the most important thing. Also, the value of my company stock increases; a good thing for me personally. On the negative side, high oil prices really endanger the economy with a recession. Furthermore, I will soon be relieved of $1,000 if the price rise doesn’t slow down. Of course, forced conservation also means hard times for some people. We must conserve, but there are certainly people suffering at these prices.

On the price issue, I continue to see many analysts reiterate what I have been saying. From the same story:

Natixis Bleichroeder Inc. on Monday said in a note to clients that oil prices above $90 a barrel may not be justified by supply data. “The oil price move to record territory has been accompanied by some geo-political issues, continued inventory draws and very aggressive buying by non-commercial speculators,” Natixis said. “That said, we are less than certain that the fourth-quarter oil market undersupply condition of roughly 1.1 million barrels a day justifies prices above $90 a barrel.”

I firmly believe that oil is overbought. The question is, will it correct before or after it relieves me of $1,000? That is going to depend largely on Wednesday. If the Fed cuts interest rates, and crude inventories drop again, I think we will see $100 oil within a week. I think there is a pretty good chance the Fed will cut rates (although I think that’s a mistake), but I don’t expect that inventories will be down again this week.

For me, the worst case scenario is that oil cracks $100, and then corrects back down to $70. That means it wipes out the beer fund, as well as my company stock value, and conservation efforts will slow.

Shakeout Predicted

I have never heard of James Mound, but I think he is correct in his assessment below. As I have mentioned, I absolutely would not buy oil at these prices. It may still go to $100 in the short term, and clearly that sentiment is helping drive the market, but the fundamentals have not changed so dramatically in the past 3 months to warrant this kind of run-up:

James Mound’s Weekend Commodities Review

Energies

Strong selling ensued on Monday as a follow through to a bearish Friday close. The market suckered in a lot of shorts, me included, and then rocketed back to fresh highs amid growing geopolitical concerns. While the concept of peak oil (the end of the growth cycle of this limited life natural resource) is well supported, it does not necessarily support the current extremes. The market is in a short covering frenzy, overextended beyond what any normal relative strength scale would measure and setting up for a serious bull suck-in and shakeout. Look to the exchange for increased margins at these prices and watch the market come crashing down. Put plays are really the only remotely intelligent way to play the bear move, but if you are thinking of going long this market here just ask yourself if you are the last person to the party. Natural gas remains independently a good market for playing long call volatility as price expansion is likely in the coming months.

If inventories pop back up this week, you could see a quick sell-off. Ditto if Saudi convinces the rest of OPEC to calm the markets. I think upside potential is small in the short-term (but high in the long term) and the risk of a decline is large. If I was investing short-term, I would be buying puts here. It is hard to believe that the price of crude has moved 10% on the back of last week’s inventory report, but I said it would provide fuel for another week. Of course the other wild-card is whether interest rates will be cut again this week, as expected. If that happens, we could run up a few more dollars. But, I think investors have already factored in an expected rate cut.

I had mentioned writing a post on a recent exchange I had with a speculator. I will get that done as soon as I can, because it will give you some insight into the financial acumen of some of the people who are currently piling in.

Shakeout Predicted

I have never heard of James Mound, but I think he is correct in his assessment below. As I have mentioned, I absolutely would not buy oil at these prices. It may still go to $100 in the short term, and clearly that sentiment is helping drive the market, but the fundamentals have not changed so dramatically in the past 3 months to warrant this kind of run-up:

James Mound’s Weekend Commodities Review

Energies

Strong selling ensued on Monday as a follow through to a bearish Friday close. The market suckered in a lot of shorts, me included, and then rocketed back to fresh highs amid growing geopolitical concerns. While the concept of peak oil (the end of the growth cycle of this limited life natural resource) is well supported, it does not necessarily support the current extremes. The market is in a short covering frenzy, overextended beyond what any normal relative strength scale would measure and setting up for a serious bull suck-in and shakeout. Look to the exchange for increased margins at these prices and watch the market come crashing down. Put plays are really the only remotely intelligent way to play the bear move, but if you are thinking of going long this market here just ask yourself if you are the last person to the party. Natural gas remains independently a good market for playing long call volatility as price expansion is likely in the coming months.

If inventories pop back up this week, you could see a quick sell-off. Ditto if Saudi convinces the rest of OPEC to calm the markets. I think upside potential is small in the short-term (but high in the long term) and the risk of a decline is large. If I was investing short-term, I would be buying puts here. It is hard to believe that the price of crude has moved 10% on the back of last week’s inventory report, but I said it would provide fuel for another week. Of course the other wild-card is whether interest rates will be cut again this week, as expected. If that happens, we could run up a few more dollars. But, I think investors have already factored in an expected rate cut.

I had mentioned writing a post on a recent exchange I had with a speculator. I will get that done as soon as I can, because it will give you some insight into the financial acumen of some of the people who are currently piling in.