Monday Morning Future Thoughts: What’s Going On with Oil?
Observations From The East Coast
Living and working in the New York City area provides opportunities to observe a large segment of the population. One would suspect that the record high gas prices would have significantly curtailed many individuals travel and driving plans. I have not noticed ANY decrease in traffic and have overheard very few complaints at the pump.
People seem to be accepting of the higher prices for the most part. This is unlike the 1970s gas shortage scare that drove prices from under .50 to over one dollar in a short period of time. Everyone was complaining and wining about it.
Is this due to much more “easy money” still sloshing around in consumers’ pockets or have most people learned that prices fluctuate, and will drift back down, keeping everyone silently hopeful of dropping prices soon?
Maybe it’s a combination of the two, it’s really hard to tell. This weekend, I had the unfortunate task of driving the New Jersey Turnpike several times over. It actually seemed to be more heavily trafficked than a normal May weekend in years past. What was peculiar however, were super long lines at the service station rest stops along the way.
I counted lines nearly 60 vehicles long at one, and the others were at least 20 cars in length. Yes, it is true that gas is slightly less on the NJ Turnpike due to regulations that prices can only be increased weekly and not daily. However, even at .20 cents less a gallon, the savings don’t seem to be significant enough to wait in those long, long lines. Does this indicate that consumers are extremely price sensitive, that saving a max of $4.00 on a fill up, is worth 30 minutes to an hour of their time? Is this some kind of silent scream of consumers who are too beat down to actually raise a ruckus about prices like they did in the 1970’s?
I don’t know, but it is definitely indicating something.
Fundamentals
Oil supplies have deviated very little over the last 5 years from the average. Certainly not enough to reflect the massive price increases. In fact, just yesterday the Saudis agreed to increase production and oil actually rose on the news!
Iraq has added 500k barrels over the last 6 months, and domestic production is at a high. Why is the market price ignoring supply fundamentals? The Iraqi Oil Minister stated yesterday at the World Economic Forum, “The oil market is well supplied and prices are being driven by speculative flows and not supply and demand.”
I agree with him 100% on this statement. Â There is something seriously out of wack here. There are theories that it is the lower dollar that is driving speculation in oil as a hedge against inflation. This is probable as well as good old fashion manipulation at the highest levels.
TECHNICALS – Yes, I Was Wrong
One of the most important lessons in trading is to learn to accept being wrong. In an earlier article, I stated that I did not believe oil would hit 125 USD per barrel anytime soon. The market quickly proved me wrong on a continued upward trajectory.
Learning to lose is the hardest part of the game for many, but it’s a critical learned trait. A strong uptrend is evidenced in the weekly chart. However price is very high above both the 50 week SMA and 200 week SMA. Price can easily drop into the 90’s and a solid uptrend would still be intact technically on the weekly time scale. Here is a chart of oil and a chart of the US Dollar. You can see the inverse relationship. Perhaps, intervention with the goal of supporting the dollar will stem the upward spiral of oil?
I suggest being FLAT oil for now.
Good Luck!
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.