Russia’s adventure in Georgia followed by Bush’s advancing the timetable for putting “defensive” weapons in Poland, followed by… Well, this could keep on going for a while. Nobody has any appetite for a hot war but it looks like a cold one is here. Bush is like a jilted lover - he thought he saw Putin’s soul but the calm glint in Vlady’s eyes was only naked ambition slaked by his knowledge that Russia is gaining the advantage every day according to their bank deposit records.
I think Putin is smart enough to know that it does not pay to push too many buttons when your opponent is both heavily armed and an idiot. Besides, he does not want to overly excite his European energy customers. So I truly doubt we will see any hostilities between Russia and the West. But I also doubt that Putin will cede his control of Georgia. He won’t consolidate his position in Georgia quickly, but I would not be buying any stock in Mr. Saakashvili.
These new international tensions are unsettling the commodities markets, particularly oil which is having a little reversal of the counter-trend. Let’s look at that in slow motion:
The Trend: bullish, hitting $147,
The Counter-trend: bearish, down to $111.50 so far,
The Little Reversal: bullish, up to $122 so far.
Oil has bounced off $111+ several times, lending that level some psychological significance. Now it’s trying to rally, buoyed by some negative supply events, the Russian tension, and a bullish opinion from The Smartest Guys in the Room. (That would be Goldman, right?)
What I don’t know (among very many other things) is whether the Counter-trend is propelled by a technical correction in a temporarily over-heated bull run or whether it is propelled by real supply/demand issues. That is: rising OPEC supply and decreasing global demand growth based on weakening OECD economies and much slower Asian growth, particularly China and India which are both concerned about growing inflation.
If the Counter-trend has been a technical correction to over-enthusiastic traders then this upside “Little Reversal” could keep going and eliminate the Counter-trend to lower prices. But if it truly is based on the global economic cycle turning weaker, we could see the Counter-trend continue with oil headed toward $100.
One thing I’m pretty sure of is that the U.S. economy - probably along with western Europe - is going to continue to slow. The U.S. looks to become very weak over the next year based on continuing lower home prices and ultimately a slowdown in consumer spending.
On the other hand, I’m not so sure the slowing OECD economies will lead to much more reduction in oil demand. I rather suspect that the “easy” savings in oil demand have already happened. Those who are willing to cancel summer travel plans or begin to carpool or to take public transport or to stop driving the kids around at their every whim have done so. It will be somewhat harder to “destroy” more demand for oil in the OECD economies based on more economic weakness.
So the possible continuation of the Counter-trend down is more a matter of:
a) whether the Asian growth story is going to slow down for a while, and
b) whether global supplies of oil are growing for the moment based on OPEC expansion that may last for anther year or so.
I’m inclined to believe we will see both a) and b). Moreover, since we are virtually certain to see a lot more U.S. slowdown, which tends to convince U.S. oil traders that oil should be weak, I suspect that the Counter trend will be back soon, that we will test $111 again, and that oil may well go back to testing $100.
On the other hand, this Russian problem is not going away. International tensions will probably keep the price of oil from going under $100. Therefore, since I now judge it unlikely that oil will go lower than $100 it is less risky to own energy stocks. Moreover, the possibility of “an event” disrupting global oil supplies has to be rated as somewhat more likely now than before Georgia.
For these reasons I have put back on part of my options-on-oil-futures strategy; I have increased my exposure to energy equities, particularly drilling/services stocks and oil sands stocks; and I have also (for other reasons) reinstated a full position in SQM, the Chilean mining company with a dominant position in lithium, along with a few small positions related to hybrid electric vehicles.
So the bottom line is that I still have a healthy cash position which I will look to invest if/when oil tests $100. But I have more of a bullish oil posture. I regret all this trading and I wish the world would just sit still for a while, but that does not seem to be our fate.
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This article has 10 comments:
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DrT
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21 Comments
Aug 21 10:17 PM-
JFrazer1
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8 Comments
Aug 21 10:36 PMGood point. Pickens was right then, we should be using natural gas as fuel. Damn, I was hoping oil would drop a bit more and relieve some buying pressure from SQM. I wanted a bargain before I buy in :)
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YogiG
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42 Comments
Aug 22 01:08 AMOne thing though, we have yet to get the titans of WS, who are intent on cornering the markets and manipulating trades between 5 trading facilites - juxtapositioning thier trades in manners that, if they were under a single regulatory body's full scrutiny, would be ruled illegal.
Certainly, this and the 'herd instinct' generating analyst reports they quickly proffer at each turn in the priceline, have got to fall in the realms of pricing manipulation, especially when you lean on the main financial media outlet to trumpet your higly speculative statements. Absolutely, this will insure the 'self-fulfilling prophecy syndrome' that you are trying so desparately to create cos' those Nov. futures contracts at $147 you own have got to get covered along with those swaps with similar dates approach - or, you will lose your shirts and pants too!
Yep, we are half there to below $100 oil.
We shall see.
Y
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john s. gordon
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706 Comments
Aug 22 08:29 AM> jack
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Jack Yetiv
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442 Comments
Aug 22 01:00 PMI do agree that oil may approach if not test $100, and nat gas may hit low $7. If they do, I am going to load up the boat (I'm already pretty loaded, though, primarily with PWE and PVX).
Jack
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Brahm
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57 Comments
Aug 22 07:53 PMWhat about Russia? It also would not wish to go to the brink in protecting its immediate neighbourhood from encroachment by hostile forces or missiles. It needs to export its energy (oil and gas) and raw materials to the west and Asia, and get technology and investment for development of its economy. It woul;d also not want to retiurn to Soviet era days when it was boxed in more than one way.
Western Europe (and the world) cannot do without Russian oil and gas for the forseeable future. So the US and Europe will pla
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Brahm
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57 Comments
Aug 22 08:04 PMReaders caught the drift though, perhaps. Things will continue in a cat and mouse fashion, even if unsatisfactorily for both sides. Neither side wants to go to the drift. Russia will assert its interests on its borders, whenever it can. It is for the UDS and Europe to figure out how not to get these countries on the periphery of Russia to behave without getting themselves be swallowed by Russia due to their fown follies (as In Georgia recently).
The markets will learn to live with this situation, if it does not get pout of hand. Oil and gas will con tinue the westward flow. In time the priceds are just going to reflect supply and demand. As long as this ha[ppens, I will be cautiously bullish long term for Gazprom, Lukoil and the Russian market..
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petersterling
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37 Comments
My Website
Aug 23 01:57 PM-
petersterling
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37 Comments
My Website
Aug 23 02:05 PMDEBKAfile Exclusive Report
August 18, 2008, 10:10 PM (GMT+02:00)
USS Ronald Reagan
USS Ronald Reagan
DEBKAfile’s Middle East sources report that the Iranian satellite carrier space launch Sunday, Aug. 17, was prompted by a joint caution to Tehran from Saudi King Abdullah and Egyptian president Hosni Mubarak.
After their meeting Saturday, the spokesman of the presidential palace in Cairo, Suleiman Awwad, said: Iran should not present on a silver platter the “justifications and pretexts for those [US and Israel] who want to drag the region down a dangerous slope.”
This warning was interpreted by the London Arabic daily Al Quds as a warning to Tehran that an attack is impending by the US, some European nations and Israel.
The article recalled the fate of Saddam Hussein “who didn't adequately refute claims over Iraq's supposed weapons of mass destruction.”
Tehran immediately responded to the warning by launching the Safir satellite carrier into orbit, thereby exhibiting a ballistic missile capable of reaching outside the Middle East, as far as Britain and France, should they decide to join an American attack on Iran, as well as US military installations on that continent.
Our military sources report that the war scare in Cairo and Riyadh also infected Kuwait.
Last week, the small oil emirate placed its military on “war alert,” to avoid being caught off-guard by a possible conflict in the region. On Saturday, Kuwait boosted its naval force in the Persian Gulf to ward off a possible Iranian reprisal against its oil installations if attacked.
The scare was fed by the impending arrival of the USS Theodore Roosevelt, the USS Ronald Reagan, and the USS Iwo Jima in the Persian Gulf to reinforce the US strike forces in the region, as first revealed by DEBKAfile on August 11.
They are to join the USS Abraham Lincoln, which is patrolling the Arabian Sea opposite Iran, and the USS Peleliu, on beat in the Red Sea and Gulf of Aden. This deployment would be the largest naval task force the US and its allies had massed in the region since the 1991 Gulf War.
A US Pentagon spokesman last week denied that these forces were gathering to impose a partial naval blockade on Iran, but declined to disclose their mission. The denial apparently failed to convince the rulers of Saudi Arabia, Egypt and Kuwait.
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Investor612
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37 Comments
Aug 23 05:51 PM