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Oil has rallied faster over the past 75 days than it did during the "bubble" last summer

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June 08, 2009 – Comments (14) | RELATED TICKERS: USO

Oil has been on an absolute tear lately Bespoke Investment Group had a great post a couple of days ago detailing just how far how fast oil has rallied recently (see post: Oil Up 99% In 75 Trading Days

The price of oil has nearly doubled over the past 75 days.  To put this move in perspective, this is a larger move than we experienced during any 75 day period during oil's bull run from 2001-2008.  Prior to this recent rally, the fastest oil had ever rallied in 75-days over the past decade was 55% from December 2001 to April 2002.  Over the recent stretch oil has risen from $33.75/barrel to $67.75 again in 75 trading days.  During the oil "bubble" the same move took 409 trading days(January 2004 through August 2005). 

It certainly appears as though oil was oversold when it bottomed recently in the low $30s.  At the same time, it certainly looks as though oil may have gotten a little ahead of itself and may be due for a pullback in the short-term.  This is why so many traders are going long natural gas and short oil.  The former has barely budged during oil's recent explosion.

Possibly the thing that scares me the most about oil at this level is Goldman's analysts are saying that oil is headed higher.  These scumbags manipulated the market and they were partially responsible for oil's huge surge to $147/barrel last summer...allegedly... (see post: Scumbags: If you can't beat 'em, join 'em).  Fool me once, shame on you...fool me twice shame on me.  I've got my position in oil and I'm not going to chase oil all the way up while these guys manipulate the market and then have the rug yanked out from under me.

I'm not really a trader by nature.  I have added to my oil position several times in 2009.  I personally would be a little hesitant to buy any oil-related stock that does not have exposure to nat gas at this point.  U.S. crude oil stockpiles are 19% higher than they were at this point in 2008.  We're currently sitting on enough for 25 days of U.S. demand, versus 20 days then.

Here's a great quote on oil from today's WSJ:

Some analysts warn that with prices being driven by investor sentiment, not market fundamentals, the leap in prices could give way to an equally sharp drop -- just like last year.

I completely agree.  Having said this long-term (two to three years from now) I strongly believe that price of oil will be higher, perhaps significantly higher than it is today.  I plan on holding my current positions and adding on any pullbacks.

Deej

14 Comments – Post Your Own

#1) On June 08, 2009 at 5:37 PM, portefeuille (99.60) wrote:

use of semi-logarithmic charts would really help. see this post (also see comment #24 of that post).

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#2) On June 09, 2009 at 10:52 AM, gmxBatteringRam (29.64) wrote:

Oil is headed back to $40. Nat gas is completely not confirming the move in oil and supply is zooming upwards. I think oil is getting used as an alternative currency due to dollar weakness as the supply/demand picture says oil should be in the 30s, not the 70s.

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#3) On June 09, 2009 at 11:10 AM, catoismymotor (30.49) wrote:

Deej,

Thanks for the blog. It helps to clear up some questions that pop into my head as I cruise past the fuel pumps on the way home.

Cato

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#4) On June 09, 2009 at 11:14 AM, catoismymotor (30.49) wrote:

Hey! Wait! I just had a rush of brains to the head! I have a question for those that short stocks: How would you best go about making money on the coming burst? I ask because I don't use shorts and am completely ignorant of the process.

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#5) On June 09, 2009 at 11:17 AM, gmxBatteringRam (29.64) wrote:

DTO will make money when oil corrects back down. Long DTO and long UNG (nat gas) is a perfect play to catch the huge difference in value of these interchangeable fuels. Either Nat gas is 175% undervalued or oil is ~60% overpriced or some combination thereof.

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#6) On June 09, 2009 at 11:27 AM, portefeuille (99.60) wrote:

Either Nat gas is 175% undervalued or oil is ~60% overpriced ...

this does not make sense. 2.75 is not even close to 1.6.

 

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#7) On June 09, 2009 at 11:30 AM, portefeuille (99.60) wrote:

okay maybe it does

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#8) On June 09, 2009 at 11:33 AM, portefeuille (99.60) wrote:

does "A is 60% overpriced at price p" mean that the fair price is p/1.6?

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#9) On June 09, 2009 at 11:35 AM, StopLaughing (< 20) wrote:

Note: it is not just oil that is showing a V bottom. Here is a case for a recovery in actual shipping of both raw materials and finished goods. The authors are claiming a V bottom in the economy which would explain why oil has a V bottom.  Mostly the steep run up in oil is from the $ weakness but it may also partly be from a V bottom in parts of transportation.

As the author's indicate the market will not top until there is total capitulation by the Bears.  Caps comments are indications that the Bears are far from capitulation. Of course their constant talk of revisiting 666 or worse is probably just a hope or wish, but it is clear the Bears have not capitulated as some actually try to short the market for very short periods.

http://www.forbes.com/2009/06/08/v-shaped-recovery-opinions-columnists-stock-panic-over.html

 

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#10) On June 09, 2009 at 11:35 AM, portefeuille (99.60) wrote:

and does "A is 175% undervalued at price p" mean that the fair price is p*2.75? if the answer to both questions is "yes", then I withdraw comment #7.

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#11) On June 09, 2009 at 11:42 AM, StopLaughing (< 20) wrote:

Natural gas is hard to transport. It will come up as US industrial demand improves. If the ratio between natural gas and oil narrows with gas rising that means that industrial activity is rising because industry is using more gas.

The oil spot price is less important than the price 2-3 years out in the futures. New wells can be/are drilled based on selling the out put forward in order to recapture drilling costs and also on the anticipated average future price of the out put over the life of the well.

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#12) On June 09, 2009 at 11:43 AM, StopLaughing (< 20) wrote:

One more thought.  In order to get a W bottom you first have to get a V bottom.

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#13) On June 09, 2009 at 11:46 AM, StopLaughing (< 20) wrote:

If there is a W price chart formation in oil over the next 2-3 years it is also likely that the stock market will tend to exhibit the same formation.  Oil price may be a very good leading indicator of the stock market in the next couple of years.

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#14) On June 12, 2009 at 2:36 PM, mustbepatient (29.44) wrote:

cato, my preferred method is to short UCO, but it can be hard to get a borrow.  Right now I am short UCO and long USO October puts.

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