Remember when $100 per barrel crude was a big story? Wondering when $110 crude will be the headline? In overnight trade on Nymex last night, crude traded at $109.72. But, in a conversation the morning of Monday, March 10, Timothy P. Evans, energy analyst for Citi Futures Perspective, offered a contrarian argument with some interesting and well grounded comments on the run-away market.
Here are some highlights:
“Fundamentally this is a bear market. It’s a market that is drawing a flow of buying on issues that are not directly related to the physical crude oil market, such as the weakness of the U.S. dollar and broader inflation expectations. So we are using crude oil as a hedge against a weaker dollar and as a hedge against inflation; and that’s why it’s $107 per barrel. We don’t have tight inventories; we have gasoline inventories at their highest level since March of 1993. And apparently, that is not enough inventory to turn the market lower. And so to my eye this looks like a bubble.”
He doesn’t claim to know how long the bubble will last, but notes that the internet stock market bubble lasted four years after Federal Reserve Bank Chairman Alan Greenspan’s famous “irrational exuberance” remark.
He says that that there seems to be an effort to redraw the market such that current higher than average inventories become “the new tight,” and that this sort of “new paradigm talk” is ultimately dangerous, because “the laws of economics have not been repealed.”
Evans adds that the four-week average U.S. petroleum demand is already down 3.4% year on year, and while some of that is weather related, demand will not recover under these price levels.
“So it’s short-term profit for fund managers and long term implications for the supply and demand of oil.
Eventually, it will all end badly, he says because the downside will not be supported by physical tightness. Evans expects 2008 to look more like 2006, when the market fell from $78.40 per barrel to $49.90 in early 2007, a 36% decline in price; and that decline didn’t include a recession or a year-on-year demand decrease.
“There may be further upside potential because the bubble is still expanding (as of today). But what are we setting ourselves up for here? There is a lot of fundamental risk on the downside and the higher we go, the larger that risk becomes, because the fundamental implications of higher prices are all bearish.”
Tags: bear market, Citi, crude oil, demand, energy, fundamental, futures
