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Tuesday, August 12, 2008


current thinking on oil

barry ritholtz provides an interesting chart (which i wish ran further back) in the context of oil prices having fallen from $147 to $114, marking the bursting of an speculative oil bubble as inflationary pressures in commodities abate and the dollar rallies under the auspices of deflation.

i closed my oil short too early in retrospect -- closing other longs as well -- and have since laddered into a long position via DIG that's been duly savaged. even russia's counteroffensive into georgia didn't put an immediate halt to oil's massive slide.

but i would say this. while speculative froth seemed to me to clearly have become a major component of oil pricing in june, and the recent battering may not have resolved that problem fully, ritholtz's chart demonstrates why oil prices are not going back to $20/bbl anytime soon. the sharpness and speed of the correction in price has been surprising, but is oil going to head straight down to $75 in a few more weeks? i sincerely doubt it.

this selling stampede in oil has probably about run its course now for the time being -- DJUSEN has been falling from its high on may 20, and has been in earnest decline since july 1. participation in the DJUSEN basket has been improving, and it may be primed for a turn up in the coming month.

but watch that world GDP line. if this credit crunch propagates into the global recession (or worse) that folks like nouriel roubini expect, demand destruction in oil may give the oil bear another down leg. we are in a big mess -- there is a massive delevering going on that is foundering the banks, as seen in credit tightening of all kinds. asset prices (particularly housing) are falling with no obvious floor. we may yet end up nationalizing large parts of the american banking system, even see episodic civil disorder. the probability of a severe global recession is insufficiently discounted.

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