Insights & Advice


It’s Not If but When Will Oil Fall?

In homage to Jack Kirby, the creator of one of my favorite comic book heroes, the Fantastic Four, we took the liberty of casting oil as Doctor Doom, the Fab Four’s arch nemesis in this column. Given the monumental angst over black gold all week it is appropriate.

I have to admit the oil price sliced right through my price target of $130/Bbl. In the futures pit contracts as far out as December 2016 were changing hands at over $139/Bbl, up $9.00 on the day and that was only Tuesday. Energy contracts to be delivered in 2012 are up 60% and shorter-term contracts have soared 35% since the beginning of the year. As the week closed oil was trading at $132.12/ bbl. The question on every investor’s mind is where does it go from here?

Down is my prediction, maybe not next week but fairly soon. It’s been my experience that when the talking heads starting running headlines like “America’s Oil Crisis” and Congress is spitting oil executives with their letter openers we should be nearing a top. Looking at a chart of oil this afternoon, the word “parabolic” comes to mind. It looks just like gold as it approached $1,000/oz. a few weeks back. Commodity prices, as I’ve said before, tend to become over extended both on the upside and the downside. Worried investors seeing the gains this week will tend to chase prices rather then have the patience to wait for prices to come to them. My advice is to wait for a pullback. You will have ample opportunity to add or initiate positions in energy if you like.

“But what if it doesn’t ever come down?” asked a colleague, itching to buy, “don’t the fundamentals justify the price.”

Yes, I said, at least in the long term. The imbalance between supply and demand for energy is a multi-year issue and one of the reasons why I am so bullish on oil, natural gas and all kinds of alternative energy. But right now there is a timing problem in energy prices. Investors, who by their nature tend to extrapolate, are assuming that because there is an energy imbalance in the future that prices should reflect that immediately. It is a common mistake we all make. Then speculators join the party and before you know it the price simply overtakes the fundamentals like it has now. Usually, reason prevails at some point and equilibrium occurs.

But oil certainly clobbered the markets this week. The airlines were especially hard hit. Higher gas prices have rocked the industry that counts fuel as their second largest cost after labor. In response, the credit agencies put nine airlines on their credit watch Friday citing the industries difficulty in coping with fuel prices. Retailers, restaurants, lodging and gambling stocks were also sold as investors figured that $4/gallon prices at the pump spelled bad news for these sectors. See my column Independent Investor: “Running on Empty” this week for more on the energy markets.

As a result, all three averages registering losses of over 3.3 % this week. The S& P 500 (-3.5%) has broken the critical support level at 1385 but only by 10 points and on light, pre-holiday volume. I will give it the benefit of the doubt until we see what happens next week but clearly the bulls are running out of room and time. If oil continues to climb expect stocks to decline even further.

Posted in At the Market, The Retired Advisor