Why is oil down? – Page 2 – Piggington's Econo-Almanac

This topic has 19 replies, 14 voices, and was last updated 18 years, 2 months ago by rseiser.

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September 21, 2006 at 9:25 PM #36033

rseiser
Participant

Thanks vrudny.
Also, if anyone has experience with a brokerage account in other countries with strong currencies. I heard Singapore is one prime example. Others could be Canada, New Zealand, Japan, or Switzerland.
I myself have a brokerage account in Germany, and I always buy U.S. (e.g. mining) stocks. It is true that they are also a little behind in most aspects, but I think one can also short now.
But I don’t like the Euro much better than the U.S. Dollar. I think the Europeans have no balls when it comes to tightening, and they will just follow the U.S. Symptoms are the ongoing deficits and the outcry of countries like Italy for devaluation. Only the balance of trade looks ok.

September 22, 2006 at 5:33 AM #36041

Trader Chris J
Participant

Chris Johnston
iamafuturestrader.com

I am constantly blocked from being able to log in but I magically got through this am so I wanted to just make a brief comment about oil.

Many of you have posted some very good commentary on possible reasons for the Oil price drop. If you go to my blog and read my Aug 16th entry, I explained why fundamentally in trading terms this market was looking bearish, the price was at 73.19 at the time which you will see.

I do not make investment decisions based on larger scale global economic judgements. The reason is that I have no idea at any given point in time which of any of the arguments put forth in here might be the actual reason behind the price movement. It is just impossible to quantify these types of things tight enough to frame a decision around.

More importantly, larger scale economic influences might very well influence the asset class but timing is very important, you can be right and get wiped out financially with bad timing. This big rally in bonds that I began telling people about in July has really accelerated to the upside. The most likely cause of this is economic weakness coming. However, that does not matter at all. The trend is up so most of my entries but not all will be longs. This is in spite of a heavy commercial short position at the moment. The trend is your friend etc..I will still countertrend trade the really extended moves for reversions to the mean. ( anx go read a book or two before making another embarassing comment about this )

Oil is in a downtrend, so just short the rallies at this point. Whether or not there is some broader economic reason for $100 Oil eventually, who knows. The bottom line for me is the trend is down. One of the old trading adages about sharp moves like this is always take the first retracement entry ( which means short the first bounce against the downtrend ).

Everyone have a great weekend

September 22, 2006 at 9:51 AM #36060

powayseller
Participant

vrudny, Nouriel Roubini is hot! I would love to meet that guy. I read his blog every day. He has many detractors, and many people call him names for his forecasts, so I can relate to him on that aspect. vrudny, you make a lot of sense, too. I like your posts very much.

More info on the drop in oil prices. Peter Schiff says it was due to speculators unraveling their positions:

Quote from Peter Schiff
Over the past several weeks, oil and gas prices have fallen sharply, prompting many to conclude that the bull market has finally run its course. With oil prices back to $60 per barrel, most are now calling for prices to fall back below $50, and some see even lower prices dominating in the years to come. As there is no real evidence that suggests an abatement of those forces that pushed oil prices up from below $20 six years ago to near $80 dollars last month, such rosy forecasts really amount to wishful thinking. The recent sharp decline is likely technical in nature, providing long-term investors with an excellent opportunity to build on established positions, or create new ones.

Oil’s impressive gain over the past six years has attracted “hot money” from leveraged speculators, particularly hedge funds piling into the market. This has resulted in increased volatility, particularly on the down side. This week we learned that Amaranth Advisors, a $10 billion dollar hedge fund, blew up, losing better than 60% of its value as a result of highly leveraged natural gas bets that turned bad. The unwinding of these huge positions obviously exacerbated recent declines, and will likely help form a significant bottom to this correction. It is important to remember that the speculative money is not the driving force behind the underlying move. The fundamentals have been powering the energy market for years, and will likely continue doing so regardless of how many speculators tag along for the ride.

I have been buying oil and gas related stocks for my clients since 1996, long before the recent run up caught most investor’s attention. In the 2002-2003 run-up to the invasion of Iraq, when most strategists were calling $30 oil a temporary fluke, reflecting a “war premium,” I agued the reverse. My take was that oil prices actually reflected a “war discount” and that rather than falling when the war ended, oil prices would rise even further. See my commentary from March 13th 2003 entitled “There is no “war premium” in the price of oil!” available here. In fact, I was one of the first on Wall Street to officially forecast oil prices of $50 dollar per barrel. After that forecast proved accurate, and most top Wall Street strategist were calling for prices to collapse below $30 per barrel, I was one of the few who correctly forecast the move above $70 per barrel. In a Barron’s article dated November 2, 2004, with oil trading just shy of $50 per barrel, and oil strategist at both Merrill Lynch and Salomon Brothers predicting a quick return to the $30 level, I was the only one quoted who accurately predicted oil prices rising to $70 per barrel.

There are two primary reasons that I still believe oil prices will continue their long-term ascent. First, years of cheap oil, and the false perception that prices would stay low indefinitely, lead producers to under-invest in exploration and development, and consumers to over-utilize energy resources. As a result, it will take a long time for supply and demand to readjust to the new reality, ensuring high prices for years to come.

Second, once Asian central banks finally allow the U.S. dollar to collapse, Asian demand for oil will surge. That is because appreciated local currencies will not only make oil cheaper for Asian consumers to buy, but result in risings living standards throughout the region. As the values of their savings and incomes rise, more affluent Asian consumers will then be able to afford more energy utilizing products. Currently the purchasing power of Asian consumers is being suppressed by their governments’ foolish policies of propping up the purchasing power of American consumers.

Since there will not be enough new oil to satisfy the explosion in Asian demand, it will instead be satisfied with oil previously consumed by Americans. The flip side of increased purchasing power for Asians will be decreased purchasing power for Americans. As a result, precisely when oil gets cheaper for Asians, it will get more expensive for Americans. As the value of Asian wages and savings rise, those of Americans will fall. The extra oil consumed by wealthier Asians will no longer be consumed by poorer Americas, who will therefore be forced to conserve and economize in ways currently unimaginable.

As the yuan or yen price of oil drops, the U.S. dollar price of oil will surge. Therefore American investors, who hold oil investments instead of dollars, will in effect be able to preserve their purchasing power and protect their current standard of living. One of the best ways to accomplishing this is by purchasing Canadian energy trusts. These unique investment vehicles offer tax-advantaged, consistently high, monthly income directly related to the price of oil and gas. With many funds off 20% or more from their recent highs, now is likely an excellent time to invest. – Peter Schiff, Euro Pacific Capital

September 22, 2006 at 11:21 AM #36072

rocketman
Participant

Since the recent rally, I am thinking of jumping in and shorting the Dow and S&P500. I found two ETF’s to short:

DIA – Diamonds Trust Series 1 -DJA Index
IVV – iShares S&P 500 Index

I was going to sell short at market and do a bracket trade with trailing stop at $1.00 for upward movement and a price 10 pts below for a target price.

First, has anyone ever shorted these ETF’s?

Second, should I increase my trailing stop to say $2.00?

Third, do you think the recent rally will be the last
considering the Philly Fed report yesterday?

Thanks for your advice.

September 22, 2006 at 4:01 PM #36109

rseiser
Participant

I have been shorting QQQQs for a while and quite frankly not made the big bucks yet. I have done OK, since I was writing some options occasionally either on the tops or bottoms, and I usually kept the premium, since they expired in my favor. I have two arguments for shorting QQQQ.
The first is that I am an engineer, and I know a little bit about the technology business. It is very, very difficult to make money as a manufacturer, let alone for an investor. There is so much competition, and prices are falling all the time as things get obsolete. The problem with that is that there is not much real growth, since if companies would sell the same stuff every year, they would make less and less money, so they really have to develop new stuff all the time. Contrast that with an Old Economy business, where prices usually go up every year, even if the product doesn’t change much. So in technology there is a lot of effort wasted or inventory written off, and among five competitors one might make good money, but then the other four lose. It is also a sector where people don’t know much about it, and this makes it prone for hype, where everyone recommends it as the newest technology, and management takes all these bonuses and stock-options etc., and have becoming cheerleaders in promoting their stock. In the end, what counts are earnings and dividends, and I just don’t see much of that. I think the rally from the 2003 bottom was just a relief rally, and not much has changed long-term (only short-term).
The second reason is the low volatility currently on the VXN. This makes it fairly cheap to buy put options, e.g. at-the-money ones, and especially on the index instead of individual companies. My thinking is that if some companies start going down, everybody else in their wake will too, e.g. Best-Buy/Dell/Intel/Applied Material etc., so there is no need to try and pick individual companies (see 2000-2002).
There would also be more downside in the Nasdaq than in the Dow if we really drop, and some people, like Jim Puplava actually like the Dow, since the companies have more reasonable P/Es and dividends. They also tend to be multi-nationals, so a drop in the dollar might not affect them at all, and they might actually rise a bit during inflation. Sure, going long might not make you much since you might gain 5% and inflation could be 7%, but if you are short, you really show a loss of 5%.
I also shorted as much as I can of CLM which has a lot of Dow stocks and trades at 52%(!) premium above net asset value. I think this is insanity pure.

Regarding entry-points, I am not the right person to ask, and regarding the rally, I think there could be one more. But if there ever was a market-crash at all, I get more and more the feeling this could be the right time. Stocks making almost all-time highs with no fundamental improvement in sight, a housing market soon drawing everybody’s attention again, and it would only take one surprise warning of a big player (car-maker, big financial institution, INTC) and all hell will break loose.

These are just my personal opinions or feelings, so far from predicting the future. But if you ever want to insure yourself against down-side, that has to be it. If we have another 2-3 years downturn, it will be too late to do it half way through.