IS OIL ABOUT TO ROLL OVER?
The oil market has been trading very oddly of late. Much like the stock market, the oil market appears to be completely detached from its fundamentals. The chart below shows the number of days of crude oil supply on the market. As you can see, the level of supply has been on a sharp march higher for over a year. I suspect we’ve been seeing a similar phenomenon in the crude market that we’ve been seeing in the banks stocks: massive short covering. Combine this with the seasonal strength of the oil market and here we are near $60 oil.
Click for larger image
What’s even more odd about recent trading in oil is its strong correlation with the equity markets. The correlation has been nearly 1:1.
If the seasonal trend continues we could see gasoline and crude trade higher into the July 4th weekend at which point the fundamentals should take firm control of the market and we could see the crude market make another big leg down. Stephen Schork of the Schork Report is recommending a long nat gas/short crude trade here. I couldn’t agree more with him.
Oil will not “roll over”
there is no substitute fuel for autos….
you can't put natural gas (at least in the US) into cars, so you will have a disconnect in the oil to gas price ratio….a long time 6:1 ratio due to heat content (6 million BTU per barrel vs 1 million BTU per 1000 cubic feet)….this ratio has now risen to 14:1….i expect this to be about 12:1 long term….and with natural gas migrating back to the $5-7 MM/BTU level….well….oil will remain high
look how many cars a year china is adding
what about india and the Tata car?
joe blow just cant give up the SUV in america
oil prices to keep the consumer down
are you old enough to remember when every economist in the US said that $50 oil will induce a recession….
we are in for hard times for a long long time
btw, the blog is great keep up the good work, its really good for for thought and making my brain fat
just a side note, natural gas demand is driven by northeast home heating (winter) and electric power use (AC cooling in summer)….very seasonal…..
especially considering the vast majority of installed generating capacity since 2000 has been combined cycle gas turbines (heat rates of about 7,000 MMBTU/kw-hr)…..now as a result of depressed natural gas prices, eastern coal fired power plants (heat rates of 10,500+ MMBtu/kw-hr) are being displaced…..look at dispatch curves in ERCOT….will PRB coal fired units be next…..doubt it….cause coal prices are falling and natural gas prices are gonna rise….
so yes, going long natural gas at these prices may be a no brainer….but i wouldn't necessarily go short oil…why take both sides of a trade? you might not have the right hedge……
It wouldn't so much be a bet that oil AND nat gas fall, but a bet that nat gas is cheap when compared to oil so might be less susceptible to declines. I don't necessarily disagree with anything you said and I have no position in either, but it's something to think about….
A few small problems with this post:
1) If Oil's rally was short covering wouldn't we be seeing OI drop instead of the increasing?
2) Going Long Natgas is tough with us on pace to fill storage in the United States by September. That leaves us the whole month of October to inject gas with no where to put it.
You can have short covering with increased OI. Just look at the banks in the last month and the increase in short interest in names like Citi.
As I said above, going long nat gas is more of a hedging bet based on valuation when compared to oil.
Great points though. Definitely debatable.