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Wednesday, February 4, 2009

Oil: See, All Bubbles are the Same


Oil (WTIC) has put in three consecutive lower highs, $52.95, $50.47 and $48.59. The $40 area has been acting as support. Failure here will result in a near instant test of $35.

Momentum favors the Bears. The MACD has already curled over and triggered a sell signal.

In Smashing the ‘Perpetually’ Growing Oil Myth I said, “If you believe that demand from India and China will send the price of oil and commodities to “infinity and beyond” you’ll end up losing your shirt and your sanity.”

I argued that demand destruction will move the oil price significantly below $100 per barrel:

“Even at $100 a barrel, prices have the effect of crowding out the marginal consumer. In this case, the cost of oil rises just high enough such that it becomes unaffordable to the marginal consumer. The marginal consumer happens to be almost everybody NOT in the first world. Basically prices will settle just high enough to wipe out any consumer surplus for these consumers and thereby severely limit demand to the highest socio-economic echelons in those countries. That level is most assuredly below $100 a barrel.”

Oil was done when the heavily subsidized emerging economies had to start moving closer to paying real market rates. I say ‘closer’, because they are still ridiculously subsidized, and still have a long way to go. I presented the consequences in Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan. While everybody is worried about the U.S., don’t forget: The Other Bigger Shoe: The Rest of The World.

Demand continues to collapse and supply continues to rise. The consequence of course is another brutal drop in oil. (EIA Crude Stocks chart here.)

In The Final Bubble: Commodities I posted chart comparing oil to all sorts of major bubbles from the Nikkei to the Nasdaq. The most recent update of that very chart is worth a thousand words.

All Bubbles are the Same. Always. Forever.

Dammit, Why Won't you Learn?

5 comments:

Anonymous said...

How about the US Treasury complex bubble?

-Mike J

dacian said...

Do you have a price target for oil?

Anonymous said...

Is there a bond bubble? When it breaks will it be followed by an inflationary wave? Is it possible to have an inflationary surge during a deflationary crash?

My answers to all the above is: yes.

What are yours, Ben?

Thanks.

Ben Bittrolff said...

Mike J,

"The US Treasury complex" isn't in a bubble. Believe it. Sure, supply is about to explode, but as % of GDP there is still a long long way to go before it becomes 'unsustainable'. Rates are climbing now to be sure... BUT deflation will cap rates somewhere reasonable... as in the single digits. Also, investors are limited in their choices. Would you buy Italian debt? UK? Malaysian? Hell, the big pensions funds have to go somewhere... and NO they can't pile into gold.

fajensen said...

Hell, the big pensions funds have to go somewhere... and NO they can't pile into gold.

Do they now?

Interest rates being as niggardly as they presently are - and with the FED running around trying to manipulate long rates even lower - pension funds might as well not bother with bonds at all and just hold cash.

Here in Denmark, I can get 4.5% p/a on a normal current account, fully insured up to any amount by the Danish tax-payers.

The government itself made this vastly extended deposit insurance to "boost confidence" and was (of course) surprised when nobody bought any bonds at rates below the cash deposit rates.

Now they are trying to "boost lending" i.e. engineer some way to get the market to eat bonds at rates below market rates. Good luck to them!!