Why the Doomsayers Are Wrong About Oil Prices

Why the Doomsayers Are Wrong About Oil Prices

by | published January 25th, 2013

Today, markets continue to advance in New York, while business confidence is returning in Europe.

Crude oil price increases have intensified along with these developments and have actually been rising quicker than the S&P for the past month.

This is seen dramatically in reviewing the portfolio of my Energy Advantage service.

Every single stock in the portfolio is making money since it was introduced. They are all in the black and strengthening.

West Texas Intermediate (WTI) next month futures contract prices for crude oil on the NYMEX are increasing again. This will mark the seventh consecutive week the prices have gained, the first time that has happened since 2009. The overall WTI pricing level has risen 11% since mid-December.

While Brent prices in London are also rising (up 2.6% for the most recent week and 2.7% for the month), the spread between Brent and WTI has lessened. It had been almost 23% of the WTI price (the more accurate way of looking at the difference) in mid-December. Currently it is about 17.4% and had been less than 16% last week.

Now all of this means something pretty important. As we’ve known for a while now, the oil market has been oversold with values unusually low. This has largely resulted from concerns over demand related to the ongoing recovery/recession debate.

However, that debate has never been a particularly genuine one, certainly not for the last two quarters. Yes, if we fell off a fiscal cliff… or ran into a budgetary wall… or failed to raise the debt ceiling… and the living room chandelier fell on our heads, there would be some substance in the Chicken Little approach to market analysis.

But we haven’t, and, we won’t. With Congressional approval ratings just above those of Attila the Hun, they will slink in, kick some cans down the street, and slink out. That means the penumbra behind which the doomsayers have operated is no longer worth the smoke and mirrors it is based upon.

Here’s why…

The Sky is Not Falling

We all know these guys. According to these prognosticators, the world is going to end. But just before that happens, you are going to lose all your money in the energy market.

Why? Because of their three arguments about the markets.

First, they say demand is plunging.

Second, they argue there is so much “new oil” being discovered that the price of a barrel will collapse to $40 or below (depending on who you read and how much he needs to sell his “insight” to cover the bills).

Third, there is a grand conspiracy (Republicans, Democrats, the White House, Congress, OPEC, the Russians, the Saudis, disco dancing, the list of culprits is endless) working against average folks.

Somehow, as trading returns to calmer expectations, some genuine market dynamics are finding their way into focus. And given a response to real factors, the price of oil is rising…with the value of related company stock in several sectors rising quicker. That usually means the expectations of those who really know the energy sector point toward a stronger recovery underway.

Don’t get me wrong. This is not all movement in one direction. Traders remain an emotional bunch. Indications of problems in sustaining oil prices or of the larger economic recovery will occasionally provide an excuse to move things south.

Upon occasion, as we witnessed earlier this year, that downward pressure can last for a month or longer. And there are sometimes data to support such concerns.

Yet the sector doesn’t stay down, and for one simple reason. Energy is the most pervasive need of an economy. If we are going to experience an across the board collapse, then energy will be going down with the ship.

But that it not happening. The doomsayers succeed only if the markets are only moving down. Any other development, renders their simplistic approach meaningless.

Of course, some of these pundits will provide you with graphs, charts and truncated figures to show the path to oblivion. Be careful what context you put these in. Disraeli, after all, was more right than whimsical when he pronounced from the floor of the House of Commons one evening: “There are three ways to hoodwink the masses – lies, damn lies, and statistics.”

In response to their concerns, let’s put this issue to bed.

Demand remains sluggish but is moving up. As the economic recovery takes hold, and we have clear indication on both sides of the Atlantic that this is taking place, demand pick up. As I have noted in OEI recently, an absolute majority of the forward economic indicators are energy intensive, and they are pointing up. These are the early indicators and have been a reason why energy prices are rising.

I have already discussed the issue of “new oil” at length in OEI. The combination of market factors, operational expenses, supply and a range of bottom line factors will determine how much is produced and released, not sterile reserve figures.

Remember, the new sources of oil are also more expensive to extract and process, while requiring significant amounts of expensive infrastructure development. All of these costs are passed on in price adjustments.

Finally, I like a good conspiracy theory as much as the next fellow does. But I would prefer they comprise a decent Hollywood script, not an approach to investing. The single biggest fallacy in blaming the “bad people” is obvious.

This remains a free market. Counter pressures to any such move, even if there were grounds for the concern, would guarantee alternative ways of making money.

I never worry about a secret society plotting my downfall. Because if it were even possible, there would be several ways to spin the moves into investment opportunities.

The proponents of the orchestrated collapse scenario also don’t want to think about the factors their “puppet masters” can’t control. Geopolitical tensions, natural disasters, and pipeline accidents.

And for good reason. All of these drive prices up not down.

On the other hand, many of doomsayers do have another agenda altogether. They are trying to convince you to jump ship and bring the market down. They are already shorting it, you see, and your response to their scare tactics makes them (not you) money.

There will be bouts with volatility coming. However, any viewpoint of longer than a few days will come to the same conclusion. Unless the Mayans return with another prediction, we are finally on a nice ride up in the energy sector.

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  1. enthusceptic
    January 25th, 2013 at 16:02 | #1

    I can only say that I agree: There is much more optimism than last year at the WEF in Davos. The trend goes upwards for the World economy, so energy demand will also rise.
    However, if the idea of clean coal isn’t completely dead, I smell a conspiracy to keep it a secret because natgas is in vogue now.

  2. joe
    January 25th, 2013 at 17:06 | #2

    It’s easy to disprove people when you put words into their mouths and then ignore the words that they actually say.

    In this little place called “reality” the overwhelming majority of “doomsayers” make the point that interest rates have been way too low for way too long.

    Do you really think it’s a “conspiracy theory” that rates are below 1%?

    You think that federal reserve interest rates are actually really high and only the nutty conspiracy theorists think current interests rate are relatively low?

    really? You really think this?

    The current bubbles WILL pop! Demand Will fall when this happens. Commodities like gold and oil WILL take a big hit before states can put their printing presses into overdrive. Then and ONLY then will gold and oil be off into the stratosphere.

    Commodities like gold and oil are clearly the best place to be in this scenario, but to claim that their wont be a dip when the federal-reserve-caused bubbles pop seems kinda dishonest.

    Governments can only inflate these bubbles for a few more years. Until then, and after then, commodities are the place to be. (and during the pop commodities will probably lose less than alot of other sectors)

  3. Ronald G OConnor
    January 25th, 2013 at 20:07 | #3

    I disagree, the world economy is still in the dumpster, the euro and it’s member nations are chaffing under the weight of debt taken on to prop up Greece, Italy, Spain with more money needing to be spent. We have numerous “swords of Democoles” hanging over our heads, housing, large numbers of defaults still occurring,companies not hiring permanent workers, it they do they don’t have good or any benefits, on and on. The business and personal climate here for growth is suppressed by a background noise of “don’t spend any money we don’t have to.” Higher oil prices soon (that will stick), I don’t think so, no matter how much Kent wishes for them.

  4. Michael Upper
    January 27th, 2013 at 13:58 | #4

    I am not knowledgeable enough to dispute Kent’s analysis. However, the question still remains about how long, as a nation, can we continue to live way past our means. Given the volatility in the markets during the past several years, timing (buying and selling of securities) is everything, even for those of us who do not choose to be traders. When will the U.S. dollar lose all value and stop being used as a reserve currency? These are the questions that we must try to answer or perhaps we all just stay out of the markets.

    Michael Upper

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