Outlook on Crude Oil

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Commodities are beautiful things to trade. It’s all about Supply and Demand. There are no analysts upgrades, dividends, Balance Sheet issues, nor Sarbanes-Oxley Act compliance issues.

The media reports about Crude Oil however, are always written like they are for equities: with bias towards causality. Here’s an example from the Associate Press:

Oil has rallied on investor optimism that the worst of the global economic downturn is over. Traders will get fresh data to mull this week when the U.S. releases a consumer confidence index for May and reports on sales of existing and new homes last month.

Let me humbly point out a few things:

  • there is no investor optimism anywhere
  • in the commodity space you have speculators or hedgers, not investors
  • no one needs to heat homes, new or otherwise, from May to September in the United States

The term mull is defined as to chew over: reflect deeply on a subject in the manner it’s used here. Um, commodity traders don’t mull unless they’re making a nice masala chai. Commodity speculators are largely technical traders of the trend following methodology. That means, yes – they read, study, and analyze the fundamentals. But no, they don’t mull things over. They enter and exit the Crude Oil market using Stop Orders.

Another curious addition, is the reference to the Consumer Confidence Index. Modeling a Crude Oil trade based on the CCI would be very far-reaching, and frankly, far-fetched:

Each month The Conference Board surveys 5,000 U.S. households. The survey consists of five questions that ask the respondents’ opinions about the following:

1. Current business conditions
2. Business conditions for the next six months
3. Current employment conditions
4. Employment conditions for the next six months
5. Total family income for the next six months

Source: WikipediA

There are two things in the near-term IMHO that may be adding to higher prices in Crude Oil.

The OPEC ministers will meet this week in Vienna to discuss production cuts. But not even they could put their econometric minds together to model something on Crude with these 5 questions. (My take is that cuts are not likely to happen.)

Iran will hold Presidential Elections on June 12, a few weeks away. Iran is the #2 Crude Oil producer in OPEC and any uncertainty about who controls the oil can cause higher prices.

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8 thoughts on “Outlook on Crude Oil”

  1. I’d agree that the media has it wrong.

    I’d respectfully ask if where oil has been trading has put any pressure on price as the resulting current price makes it impossible (?choice of word) to get the hard to reach oil?

    Also, after watching “A Crude Awakening” and seeing how countries cook their reserve numbers like Enron cooked its books: Could there be a supply side issue?

  2. I’d agree that the media has it wrong.

    I’d respectfully ask if where oil has been trading has put any pressure on price as the resulting current price makes it impossible (?choice of word) to get the hard to reach oil?

    Also, after watching “A Crude Awakening” and seeing how countries cook their reserve numbers like Enron cooked its books: Could there be a supply side issue?

  3. Davos –

    Thanks for your comment. Please see Kronicle TV Episode 3. It addresses the fact that many OPEC members, especially Saudi Arabia, overstate their reserves perennially. In doing so, they are able to sell more crude in the world markets at present.

    It will catch up with them. And when it does, we don’t want to be the last to leave that party.

  4. Davos –

    Thanks for your comment. Please see Kronicle TV Episode 3. It addresses the fact that many OPEC members, especially Saudi Arabia, overstate their reserves perennially. In doing so, they are able to sell more crude in the world markets at present.

    It will catch up with them. And when it does, we don’t want to be the last to leave that party.

  5. Don’t forget that estimated reserves are always changing; and, oil in storage is coming down. We may not need to heat homes, but we do like to gas up our cars and planes for summer vacations. Further, I would think more people are taking vacations closer to home — implying more gasoline and less jet/gasoil/h.o. usage. That’s going to require some time for refineries to adjust and lead to higher prices in gas and crude.

    The media always messes up what moves commodities. For example, take the whole WTI-Brent “decoupling:” total garbage. Once you consider the time required to do the physical arb, you see that you have to compare near WTI to next Brent and, poof, the decoupling is not such a story any more. Similar to how most writers always forget that most of the telling action is at the front of the curve.

  6. Don’t forget that estimated reserves are always changing; and, oil in storage is coming down. We may not need to heat homes, but we do like to gas up our cars and planes for summer vacations. Further, I would think more people are taking vacations closer to home — implying more gasoline and less jet/gasoil/h.o. usage. That’s going to require some time for refineries to adjust and lead to higher prices in gas and crude.

    The media always messes up what moves commodities. For example, take the whole WTI-Brent “decoupling:” total garbage. Once you consider the time required to do the physical arb, you see that you have to compare near WTI to next Brent and, poof, the decoupling is not such a story any more. Similar to how most writers always forget that most of the telling action is at the front of the curve.

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