Wednesday, November 23, 2005


Those who have expected oil to hit $100 soon (including Goldman Sachs) are having to eat crow; Goldman reduced its year end price projection to $62. Crude oil supplies in the US are far above the historical averages. More importantly, proven reserves have reached a record of 1.2 trillion barrels; more reserves are being found.

A number of years ago, a university scientist (my memory for names is terrible) put forth the theory that oil is being constantly "manufactured" in the depths of our planet. He believes centrifugal force is pushing the oil to discoverable locations.

The theory has not been proved but it explains the fact that former oil pools that were "played-out" keep filling back up! Some wells have yielded dramatic increases and estimated proven reserves were never higher.

Peak oil alarmist keep telling, time and again, about depletion of reserves. There is no doubt that many wells have been pumped virtually dry, however, rig counts are at the highest level in years and "new" oil is being found daily. Regardless to the validity of the theory, the chair of XOM estimates that there are more than 3.5 trillion barrels yet to be easily found. He estimates that there are just as many more in difficult places to find.

In Japan, horizontal drilling is being used to collect oil from beneath major city populations. Russia has seen the largest increases in production in the past 10 years.

It will be 2007 before the first of several plants to produce liquid fuel from coal will be in operation in China. Senator Robert Byrd has proposed the construction of similar plants in the US.

The current price of crude includes as much as a $20 premium because of hoarding or speculation. As long as there are investors who believe the price is headed to $100, hoarding will continue. However, the cost to the hoarders keeps going up dramatically. They are suffering from higher interest costs and from capital losses now that the price has headed down. The dike is now leaking in several places. Pretty soon, another speculator or two will tire of plugging holes and the flood of crude will drive prices down.

Last year, the week after Thanksgiving, crude market prices dropped. Historically, December is a down month. The focus of bloggers is on US supply and demand, but while the US has been adjusting to tighter markets for many years, China and other developing nations have recently made rapid adjustments to higher prices.

For the past couple of days, the price of crude has climbed in the face of, surprise, surprise, surprise, cold weather that hit the northern hemisphere. This price bump is a temporary phenomena as Gulf production continues to recover and supplies continue to rise. Short-term projections can never be more than educated guesses but the current circumstances lead me to believe a break in prices is near.

Should oil break, gold and other metals will break to the downside and bonds will break to the upside (lower yields). Transportation, retail and technology stocks should do well. On the other hand, the current rally is long in the tooth. Markets typically consolidate or even pull back a bit after such strong runs. Many, who were major bears two months ago, are now extremely bullish, a negative short-term market indicator. Without a break in oil prices, I expect the market to struggle to make new highs over the next two or three weeks. Should the price of oil NYMEX oil break below $55, all bets are off; you will be thankful to hold large stock positions.