![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
I'm beginning to get puzzled by oil. Its current spot price and the price for future delivery just doesn't seem to make sense. It's as if every futures trader in the world was convinced that production levels were going to fall off a cliff the week after next.
Any number of experts can be wheeled out on TV to tell you why the price is so high; they may well be the same experts who assured people that house prices in Las Vegas would only go in one direction because it was the fastest growing city in the US. The tricky thing about these expert prognoses is that they usually obtain a veneer of truth that conceal an underlying logical flaw.
So, let's look at some of the surface truths:
1) A weak dollar.
A) Well, yes, but the recent decline in the dollar has not been directly correlated with the rise in the price of oil, and the futures price of oil is definitely not correlated with the futures price of the dollar.
2) China and India.
A) Once again yes. But there's been no change in demand levels here to explain the recent price change.
3) Shortage of refineries.
A) No longer true. The "spike" caused by this has about worked itself out.
An important point to make here is that all oil is not created equal. The "headline" oil price is usually related to a light sweet crude -- Brent or West Texas Intermediate. In the past few months there's been a significant rise in the spread between light sweet and/or low sulphur content and so-called "sour, or heavy crude with a high sulphur content. There are fundamental reasons for a differential, but there don't seem to be fundamental reasons for a significantly widening differential.
Which brings me to the Hunt brothers (Nelson Bunker and William Herbert) and their attempt to corner the market in silver. This drove silver to record prices in 1979 and a lot of money was made and lost. I don't think that there's a deliberate Bunker Hunt cabal at work here, but it does seem to me that the frenzy for sweet crude futures is feeding on itself and is outpacing the actual demand for the stuff.
That would mean that a lot of money could be made on the future price of sweet crude, if you can get the timing right. Of course, if you get the timing wrong, then you lose money (the Hunts went broke) , but this is a situation where you can restrict your downside and have a fairly large upside -- as is often the case when prices get out of touch with reality.
So, what might the timing be? Well, the Hunts started building up silver stocks for nearly a decade before the big rise took place, and the fourfold spike took place over four months, before falling back to the old price two months after that.
That would hint to me that if the current frenzy continues, we might see a peak around September and a fairly dramatic pullback by January. What might the peak be? Ugh, that's a toughie. How about $160 for light sweet, with a $40 differential over heavy sour?
Unfortunately, if you go manically short at $160, and it pushes up to $200, then you go rather broke. And if the peak turns out to be $158 before falling back to $90, you feel a bit sick because you never got a bet on.
I don't know the answer to that poser.
++++++
Any number of experts can be wheeled out on TV to tell you why the price is so high; they may well be the same experts who assured people that house prices in Las Vegas would only go in one direction because it was the fastest growing city in the US. The tricky thing about these expert prognoses is that they usually obtain a veneer of truth that conceal an underlying logical flaw.
So, let's look at some of the surface truths:
1) A weak dollar.
A) Well, yes, but the recent decline in the dollar has not been directly correlated with the rise in the price of oil, and the futures price of oil is definitely not correlated with the futures price of the dollar.
2) China and India.
A) Once again yes. But there's been no change in demand levels here to explain the recent price change.
3) Shortage of refineries.
A) No longer true. The "spike" caused by this has about worked itself out.
An important point to make here is that all oil is not created equal. The "headline" oil price is usually related to a light sweet crude -- Brent or West Texas Intermediate. In the past few months there's been a significant rise in the spread between light sweet and/or low sulphur content and so-called "sour, or heavy crude with a high sulphur content. There are fundamental reasons for a differential, but there don't seem to be fundamental reasons for a significantly widening differential.
Which brings me to the Hunt brothers (Nelson Bunker and William Herbert) and their attempt to corner the market in silver. This drove silver to record prices in 1979 and a lot of money was made and lost. I don't think that there's a deliberate Bunker Hunt cabal at work here, but it does seem to me that the frenzy for sweet crude futures is feeding on itself and is outpacing the actual demand for the stuff.
That would mean that a lot of money could be made on the future price of sweet crude, if you can get the timing right. Of course, if you get the timing wrong, then you lose money (the Hunts went broke) , but this is a situation where you can restrict your downside and have a fairly large upside -- as is often the case when prices get out of touch with reality.
So, what might the timing be? Well, the Hunts started building up silver stocks for nearly a decade before the big rise took place, and the fourfold spike took place over four months, before falling back to the old price two months after that.
That would hint to me that if the current frenzy continues, we might see a peak around September and a fairly dramatic pullback by January. What might the peak be? Ugh, that's a toughie. How about $160 for light sweet, with a $40 differential over heavy sour?
Unfortunately, if you go manically short at $160, and it pushes up to $200, then you go rather broke. And if the peak turns out to be $158 before falling back to $90, you feel a bit sick because you never got a bet on.
I don't know the answer to that poser.
++++++
