Oil on its Way Up Again?

11/18/2008 1:50 pm EST

Focus: MARKETS

Peter Way

Founder and CIO, Peter Way Associates

Peter Way, editor of Block Traders’ Oil & Gold Monitor, says big money is betting on higher oil prices.

The January’09 crude oil futures contract already has a much higher price range forecast than the December contract. Crude is the “least common denominator” in an industry where everything relates back to the delivered cost of a million BTUs of usable energy. That is because Crude has been the lowest cost energy source to extract, process and deliver. Its processing involves minimal environmental costs, and it is easily stored. Stocks of energy supplying companies and those that support them tend to reflect crude price trends and its prospects, so there may well be stock buying opportunities now that have small probability of seeing prices this low again. Oil prices back above $100 a barrel are quite likely in 2009, and a return to this year’s high is possible. Just $100 would be an increase of over 60%.

Why are the big players in Crude, energy industry and investment participants alike, so optimistic about its price in coming months? Don’t they know that there’s a worldwide credit freeze on? Don’t they see the plunge in auto sales with GM and Ford, hats in hand, begging in the beltway? Don’t they hear about China’s post-Olympics slowdown? Don’t they know about the glut of tanker transport capacity? Don’t they know that OPEC members always cheat on announced production cutbacks? Can’t they read the inventory statistics?

Could it be that they think the credit freeze may thaw? Could they believe that drivers in the US will go back to pre-$4 a gallon driving habits? Might China emulate the US and pump tons of liquidity back into its own banking system and stimulate its businesses to compete worldwide? Could they believe that it’s always safer to bet on shortage than on oversupply? Could they believe that the odds of an Israeli take-out strike of Iranian nuclear facilities between now and January 20th, followed by massive supply disruptions, are much higher since the US elections?
Could they believe that the Democrats, finally occupying the White House, will be able to socialistically turn the “Bush era” into a middle-class nirvana?

We don’t know. But the bets are being made, at a $100-billion scale, that crude’s price path to come is up. Are these folks such great forecasters that they should be believed? Well, they saw the decline in Crude prices coming, and bet on it. Our July newsletter showed that the trend of forecasts out to December’08 was down, from $145 to $95. Subsequent forecasts have been down to $65. Perhaps more importantly, are bets being made by the million-dollar market-makers that their big fund clients are likely to urge specific energy stock prices up by their investment actions?

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