Oil Is Running, How Strong Are It's legs?
James Bibbings, June 12th, 2009
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Question: If the run up in oil is not fundamentally driven, where are we headed? Is the worst of the economic crisis behind us?
Response: Although the broad markets and media tend to believe the worst of the economic crisis is behind us, I still do not entirely concur. At the risk of sounding foolish later, it is my current feeling that the worst of the crisis will be upon us within the next three to six months. If that is indeed the case, a retracement could drive fuel prices lower or near to where they were in December of 2008. [At that time fuel costs were about $1.65 a gallon nationally.]
To that point, it seems almost incomprehensible to me to consider a significant change in the demand outlook for crude over the near term. Certainly suppliers are trying and will continue to try and tighten up output, but that can only go so far. The more suppliers close up shop, the more they impede much needed cash flows. How can a company, or a country for that matter, service debt with no cash on hand? On top of this it seems that people are trying to look past the fact that the US is the largest consumer of oil in the world. So again, with ongoing unemployment claims rising, our unemployment rate climbing, and a geopolitical agenda that is pushing the world towards greener technology, where will increased discretionary income or demand come from in the near term?
Question: What will lead us to recovery then?
Response: We need to remove all bad corporate and personal debts from our financial system. We cannot continue to bail companies and individuals out forever. Around the world, not just within the US, the "save the economy" spending spree will have to eventually stop. At that time we must allow the system to reset itself through personal and corporate bankruptcies. As we now know through Lehman Brothers, GM, Chrysler, Indymac, and others, the world will not end if "too big to fail's" fail and declare bankruptcy. The United States lived beyond its means for far too long and is now suffering the consequences of this lifestyle. So again, our debts need to be washed clean from the financial system before we fully recover and I don't believe that has occurred yet. [Karl Denninger touched on this during the week, check it out]
Question: Any final thoughts on crude? Where will it be trading between now and the end of the month?
Response: As of now crude oil is starting to look a bit overbought and may be set for a pull back. This pull back should be even more pronounced if the US dollar is able to hold its footing. Over the past week the Dollar has hit technical support at USD Index 78.00 and has held. This, along with weak underlying fundamentals for oil, suggests to me that crude may be ready to turn between now and July. Until that turn, I expect pump prices to hold between $2.45 and $2.65 nationally assuming no more major refineries go offline. However, around mid summer to early fall I expect to see oil trade between $40 and $55 per barrel with pump prices coming in line. At that time I would expect them to start stepping down towards levels not seen since December of 2008. [For a more detailed discussion of my long term forecasts see "Oil at $25 a Barrel? Gas $1.50? The Time Is Coming Soon"]
-James Bibbings
