Bullish on Oil, Bearish on Stocks

07/28/2010 11:26 am EST

Focus: MARKETS

Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ Oil & Gold Monitor and Block Traders’ ETF Monitor, says oil prices are likely stable but the current stock rally won’t last.

When stories get old and cold, the ability to magnify uncertainties decreases, until the audience tires of the subject to the point of ignoring it. We are approaching, if not in, that stage with the BP (NYSE: BP) Gulf of Mexico Deepwater well blowout disaster.

Just as well, since as far as world supply of energy [is] concerned, the delay in having the

Macondo well fully productive is fairly trivial. Its production potential obviously is not trivial, particularly to the companies sharing in its output.

Since crude [oil] is the most economical world-wide energy source, its price influences all other energy-source prices. The most competitive alternatives in turn create a restraining influence on crude, as their increased prices allow them greater ability to reach previously uneconomic markets.

A good illustration is the Canadian tar sands, which at Crude prices of $30 a barrel were a very marginal bet, but at $60 are highly profitable in the geographically adjacent USA. Both nuclear power and coal gasification are competitors with sufficient capacity potentials to restrain runaway crude prices.

On the COMEX, we see what financial speculators believe can happen to crude prices between now and [the expiration dates of] various futures contracts. Their conjectures usually are restricted to impacting only the front- and next-month contracts, typically with transient effects.

But in 2008, circumstances allowed their influence to persist in carrying even longer-term futures prices to as much as twice their normal height. [The] current picture makes it evident that speculators believe the energy industry is continuing to grossly underestimate future possibilities.

In July of last year, the December 2010 contract temporarily dropped below $70 a barrel, but then returned to levels in the mid $70-80 range. Energy industry contract hedgers’ expectations have been quite stable since then.

[Meanwhile,] the upside appeal of the [stock] market’s [recent] “correction” to date has grown to be nearly as attractive as upside prospects were back in mid-March of 2009, at the point of the upturn.

But then investors, including the professionals, were truly fearful that the bottom had not yet been seen. No such fears currently upon us are being expressed in the way market-makers are protecting themselves.

Those agile enough and sensitive enough to value shorter-term profit capture should celebrate—carefully. But if buy-and-hold is your determined game, this correction may be in its early innings.

We enlist the professionally honed, live-market judgments of active risk-averters. Right now they see very few buying opportunities other than the leveraged long trackers of major market averages. The stress on the 2x and 3x leveraged funds suggests a brief, pronounced rally, but not a lasting one.

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