Sunday, June 28, 2009

Oil About to Tank

and when it does, it won't be bullish for the economy or the future economic outlook. As if it isn't enough that Goldman Sachs just put a bullish target on oil at $85/barrel recently (this is a warning to sell oil), the divergence between the price of oil and oil stocks is a confirmatory warning not to be ignored. The Goldman indicator is rock solid (do the opposite of what Goldman says about 2-8 weeks after they say it), but to have the oil stocks also confirm means oil's run is very close to being over. We may double top or print a minimally higher high in the oil price, but don't bet on it.

Using commodity stocks to predict turns in the underlying commodity price is an important analytical tool for those seeking to trade this sector. It would have got alert traders out of oil last year before the collapse in the oil bubble and it can help oil bulls avoid another whack right now. I am bearish on oil and commodities because I am in the deflationist camp (for now).

Anyhoo, to the charts. Following is an 18 month daily chart with a plot of the oil price ($WTIC - the area plot) and the Dow Jones U.S. Oil and Gas Index ($DJUSEN - the black line plot):

I think commodity bulls need to be prepared for the possibility that their worst nightmare may come to fruition (11.5 year weekly log scale chart of the $CCI, which is more equally weighted than the oil-heavy $CRB):

For those who think this can't happen, I ask you: did your commodity expert predict the fall crash? Did Goldman Sachs tell you oil was going to $200/barrel right before the plunge?

All the economic pieces are in place for such a bearish commodity scenario. People are again using tankers to store oil based on solely on futures contracts price variances that have already locked in a guaranteed profit for the big boyz while demand is dying on the vine. Commodities, with the exception of certain foods, are sensitive to economic conditions. Who the hell wants copper when building and demand for residential and commercial real estate has ground to a halt? And please don't give me the China bullshit - China is screwed. An export-based economy in the setting of an economic collapse in the U.S., Japan and Europe (the world's biggest three customers by far) is not going to be able (or want) to purchase enough commodities to prop up prices.

Don't get me wrong - I'm fully hedged against a dollar devaluation and I recommend everyone purchase such insurance. But I use Gold because it is not a commodity, it is an international currency that can't be debased by ignorant apparatchiks. Gold requires no economic activity to retain its value. When trust breaks down, people look for something that requires no trust. I don't think food or water are bad investments, but the oil price is about to get whacked, as are the prices of base metals. First deflation, then inflation.

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