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starbucks4ever (92.59)

It's time!



August 31, 2010 – Comments (14)

With this post, I am starting a new theme in Caps, and, starting from tomorrow, in my real-life account. Yes, folks, it is time to short this ridiculous oil and gas bubble. The intrinsic value of 90% of companies in this sector is zero.

I will hedge my risk carefully so that I could ignore all the Goldmans and J.P.Morgans in the world even if they decide to produce one last dead cat bounce, but I don't think they will. Because, let's face the truth, the bull market in petroleum is over, and they know it.

Yes, it's over now. I am shorting the oil bubble at the right time.    

You don't have to call the top accurately to make money on the short side. You say the best time to short was 2 years ago? You are right, but there was no way to determine that it was the top back then, except by a pure stroke of luck. But getting married to a cost basis is a mistake, as the market has proved again and again. Was it such a bad idea to short builders after the subprime crisis made them "cheap"? Would you red-thumb HGSI after a 50% drop from the peak, or would you kick yourself for missing the first act and wait for a second chance to short it at the peak?

The real market price of oil is $8 a barrel, and Obama is not going to lift a finger to save this bubble from popping. Yet these companies trade as if GS is going to be selling $60 contracts to bagholders forever. This is simply a rerun of the dot-com era, only this time instead of online pets it is decomposed dinosaurs that they are selling.     

Now, consider a huge leveraged business like XOM, with $150 billion of debt and $95 billion of cash and investments, and what do you see? A new GM, in the best case. I say, in the best, because the real GM at least returned a good part of its market cap to shareholders through its 8% dividend before giving up the ghost. 

But if XOM, COP and CVX might eventually survive as small-cap penny stocks assuming some generosity on the part of Uncle Sam and bondholders, things are even worse at the midsize oil companies and especially nat gas companies. Overleveraged, overinvested, accustomed to bubble prices and lacking the most productive oil wells of Saudi Arabia which alone can generate a profit at a time of TROUGH OIL, these companies face total extinction once the music stops playing. 

And the music is getting quieter and quieter. The supply of believers in Peak Oil is dwindling, and the talk about limited supply of oil will soon become a mauvais ton. On the demand side, the Chinese economic miracle is ending with a most spectacular bust, leaving bagholders with pockets full of contracts and futures for oil that nobody will need in the next 20 years. And the smart speculators are getting ready to ride the price all the way down to $8 where it will find a bottom and stay at that bottom until 2035 or so. When they openly discuss $10 oil on CNBC, you know that the game is up and that most specialists have already left the market. 

It will be a long and profitable ride, at the end of which all the money made by commodity bugs will go to its rightful owners - the shorts who have the discipline and patience to stay the course, fixing the profits, and avoiding short squeeze situations. And each time commodity bugs will get aboard the sinking ship, attracted by cheap valuations...only these valuations will just keep getting better and better.

So let the game begin. First it will be a dozen of red thumbs, then 20, 30, 50, and eventually my Caps portfolio will become one big sector bet. We are entering the era of trough oil. Position your portfolio accordingly.

14 Comments – Post Your Own

#1) On August 31, 2010 at 10:46 PM, Option1307 (30.57) wrote:

+1 for the thoughts.

While I almost entirely disagree with your statement, 

The real market price of oil is $8 a barrel

I have to give it to you. You have been calling this for a long time now, and I'm impressed to see you actually follow through on your bet. No way no how.

I will concede that the price of oil is most certainly manipulated/exagerated/volatile because of speculation etc., but I just don't see how we can ever get to $8/barrel oil. Even during the peak of recent crisis/deflationary environment we only saw $35/barrel. Furthermore, how can you believe in 2035 we are still going to be in the single digits? Only way this happens is if we have acomplete global depression/collapse and even then it would be stretching it.

Obama is not going to lift a finger to save this bubble from popping. 

BS. If this bubble really does pop as you say and remain deflated for a long time as you think, it would literally destroy pension funds, 401K's, IRA's, Mutaul Funds thereby destroying the average American investor. No way will this ever happen. I honestly cannot imagine a politican ever allowing this to happen. And to top it off, the oil compnaies are basically a government sanctioned cartel, they would never stand for this.


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#2) On August 31, 2010 at 11:44 PM, awallejr (35.81) wrote:

Yet you seem to disregard China and India in all this. You think we are still flush with oil when we have to drill deeper and deeper in the continental shelf?  Not to be denigrating, but to call $8 oil per barrel is flat out moronic, especially since it costs more than that to produce.

Wouldn't surprise me to see oil drop to say $67 per barrel, but not much lower.  Too many new cars being built in emerging markets with dwindling supply.

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#3) On September 01, 2010 at 12:07 AM, Harold71 (< 20) wrote:

For once, I agree with awallejr.

Unless this entire post is tongue in cheek, I hereby nominate zloj for Idiot of the Day.

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#4) On September 01, 2010 at 12:40 AM, Tastylunch (28.66) wrote:

The real market price of oil is $8 a barrel,

Based upon what?

Bold claims require bold evidence.

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#5) On September 01, 2010 at 1:30 AM, tomlongrpv (61.42) wrote:

I don't know enough to agree or disagree with you (although with my investments in BP and Shell I guess I am disagreeing with you).  But I admire you for providing us all with some provactative and potentially helpful thoughts.  If you turn out to be correct I will be monitoring your blog even more closely.

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#6) On September 01, 2010 at 7:18 AM, outoffocus (23.78) wrote:

Oil has been trading in the 70-80 range for like the past year.  Natural Gas between $3-4. Wheres your bubble?

In the meantime Treasuries are paying practically negative yields...

Well...good luck with that.

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#7) On September 01, 2010 at 8:44 AM, rd80 (95.80) wrote:

Chevy better scrap the Volt and start scrambling to get a supercharged, V16 powered Suburban on the market.

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#8) On September 01, 2010 at 9:22 AM, ElCid16 (94.53) wrote:

scrambling to get a supercharged, V16 powered Suburban 

I know the guys at GM are pretty empty-headed, but a V16 would have a hood so long, it'd look like an alligator.  Hopefully, they'd at least use the W16 engine model...

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#9) On September 01, 2010 at 10:38 AM, Dow3000 (< 20) wrote:

Haha, wow you got some people fired up at you.  Ok, so the only way oil will get that low is a global depression.  While I agree that this is absolutely on the nearterm horizon...I wonder why you just talk about energy being overvalued?  Personally, I think the most overvalued sector is financials...every last bit of the profits in this sector are total bs.  I would honestly be surprised if less than half of all US banks fail in the next cpl years.  Or, if you want to stick with commodities...copper is shockingly overvalued...this sector will get destroyed when people realize the China miracle was simply made up by the idiots on CNBC.

To the person saying you didn't include China and India in this are wrong...he did in fact mention that China will be busting in a spectacular fashion.

Ok, so I agree with you near term...but you went on to talk about oil staying at $10 til we have a biiiiig problem.  You are obviously not taking into account the popping of the dollar bubble.  While a hyperinflation can still be prevented...a plummeting dollar in a few years absolutely cannot.  My personal belief is we may have to find a new currency in the not so distant future.  This isn't necessarily bad b/c the current Federal Reserve system is a sick joke and a HUGE failure.

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#10) On September 01, 2010 at 11:15 AM, lctycoon (< 20) wrote:

Oil to $8/bbl?  Seriously?  No chance.  If it even starts dropping that low, every oil producing country and company in the world will throttle production so much that the gas lines will be 30 miles long!

China does indeed appear to be in a bubble, but I think you overestimate the size of it.

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#11) On September 01, 2010 at 11:24 AM, rockbox64 (20.24) wrote:

Instead of shorting, why don't you just take the money you were gonna use, I'll take your action, and we can cut out the broker's commission.  Whaddaya say?

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#12) On September 02, 2010 at 1:15 AM, awallejr (35.81) wrote:

to the person saying you didn't include China and India in this are wrong...he did in fact mention that China will be busting in a spectacular fashion.

I said he disregarded them.  Those two auto markets are expected to continue to grow dramatically. Sorry, you aren't seeing $8 oil unless PALG actually produces massive algae energy in the near future (which isn't happening, although GS wants to sucker you into buying it).

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#13) On September 04, 2010 at 4:18 PM, RonChapmanJr (30.31) wrote:

I am willing to bet that we see $8 a gallon before we see $8 a barrel.

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#14) On September 04, 2010 at 4:44 PM, starbucks4ever (92.59) wrote:

"I am willing to bet that we see $8 a gallon before we see $8 a barrel.  "

Yes, 8 Zimbabwe dollars per gallon could come earlier :)

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