Don’t Follow the Energy Bears

07/31/2008 12:00 am EST

Focus: MARKETS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says crude is going through a correction but will bounce back nicely.

Crude oil is taking a well-deserved breather, but this is only another technical correction in an ongoing commodity bull market.

There is evidence that positions held by exchange traded funds and hedge funds will have some influence in this correction, but all the monkey business in the world cannot create a bear market out of bullish fundamentals. Speculation can increase volatility—especially in the short term—but crude oil prices are high due to supply and demand dislocations.

Global production is, in fact, decreasing. As their fields become depleted, exporting countries will begin to hold back more of their production for their own use. New drilling will be welcome, but production from those efforts is many years away. Global tensions in delicate, producing regions are growing more tense rather than less. Fundamentally, the world has run out of cheap oil, and although there are substitutes for some oil derivatives, there is no substitute for crude oil.

The US recession is going to surprise the majority, including Congress. The surprise is that it is going to last longer than expected. There are going to be more financial institutions going the IndyMac route before this is over, and public sentiment is going to get more pessimistic in the process, regardless of trumped-up statistics.

In the process, the growth of US energy consumption will abate some, but not enough to offset energy growth in emerging economies. Although China’s economy may cool off from white hot to red hot, Asia is still on the economic-growth fast track. The big push is on to build badly needed infrastructure. Creating infrastructure is energy intensive, and the use of infrastructure demands energy. The next to emerge will be Africa.

Bottom line, we are going to see further weakness short term in the energy complex, and it may get a bit scary. I have had a downside of $108 [per barrel crude] for some time, and although it is a long shot, we could see prices tip that level. We will be buying into weakness, and prices may well dip under our buy prices temporarily.

With the influence of hedge funds and ETFs holding huge, speculative futures positions—erroneously allowed through their bogus status as hedgers—crude oil could display vicious momentum. A more likely downside is $115 basis August.

My advice is to turn off the TV and throw away the paper. Steel your resolve against the energy bears. The bears will prove once again to be wrong.

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