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Monday, July 28, 2008

The Final Bubble: Commodities

Crude Oil Rises After Nigerian Militants Claim Pipeline Attacks: “Crude oil rose, rebounding from a seven-week low in New York, after a Royal Dutch Shell Plc pipeline in Nigeria was attacked by militants.

The incident occurred on the Nembe Creek trunk line in Rivers State, Shell spokeswoman Caroline Wittgen said. The rebel group, the Movement for the Emancipation of the Niger Delta, or MEND, claimed responsibility for damaging two pipelines in an e- mailed statement.”

Some old story. Oil drops quickly and significantly and almost immediately somebody somewhere gets on the phone and ‘motivates’ some group of militants to start making some noise… Those oil trading warlords sure have a good thing going eh?

A technical bounce in oil is overdue. Failure to move higher this week would be an incredible sign of weakness. Oil, now deeply oversold, could bounce to the 50 day EMA (red) around $131. Additional resistance is around $135.

Never forget that demand destruction for oil is now accelerating. Demand destruction in first world countries while significant will be exceeded by far more complete demand destruction in emerging economies.

Funds for Highways Plummet As Drivers Cut Gasoline Use: “A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.”

It really is Time to be Short Commodities. Expect bounces. Some of which will be quite large. Wait for them to lose their momentum before going short.

Commodities Seeing Demand Destruction, Canada Rolls Over. When commodity producing economies start to wobble, the top is almost certainly in.

The commodity heavy Canadian market put in what appears to be a significant top. The MACD rolled over long before prices did. A brief bounce failed at the 200 day EMA (green). The rapidly falling 50 day EMA (blue) is rushing in to pair up with the 200 day EMA to increase resistance around the $83.00 area. Failure to hold the $79.00 area would result in a quick, brutal wave of selling into support around $75.00.

Remember, Oil Drops on Subsidy Cuts in China, India, Malaysia and Taiwan. That is when and where the real demand destruction will take place.


Anonymous said...

Welcome back,

Here is a chart of the OI of the CL market...

It appears that speculators have been going short and waiting for the pull back. Is it a bubble if commercials are long, and speculators are short? Or is it a bubble because prices have caught up with demand, and the old revision of mean trade rises to the surface?

If world demand stays above world supply, even in a declining demand economy, you will still have incrementally higher prices...


Technically net short as a speculator, but aware that demand is not allowing above ground reserves to build.

Anonymous said...

Are you including gold as a commodity? What is your prediction for it?

Anonymous said...

Currently the investment demand for gold remains strong as the stock markets tanks; this is seen in the ratio of gold relative to stocks, GLD:VTI, remaining firm.

Although gold may fall in the short term, an investment demand for gold will be taking gold awesomely higher.

Anonymous said...

Love your commentary.

Respectfully disagree re: oil.

You can always print more stock certificates for the Chinese, NASDAQ or Japanese markets. You can't print more oil. I think we're in a typical severe currection in an ongoing bull market for oil/natgas.

If 1 billion Chinese and 1 billion Indians suddenly decide to each turn on one more light bulb per year, imho I think we're out of energy. Tanta Motors isn't helping either.

This of course will play out over the long-term, but even if supply increases and demand drops, we're one Saudi terminal explosion or one Iranian sunken ship in the Straits of Hormuz away from MUCH higher oil.

I think the risk/reward is definitely to the upside - a lot of oil bears are coming out of the woodwork now.

Anonymous said...


If 1 billion Chinese and 1 billion Indians suddenly decide to turn OFF 1 more light bulb per year, then what? As Ben mentioned, demand destruction is occurring and the BRICs are seeing the worst of it. If 90% of China live on less than $5000/yr, what do you suppose they're going to do: turn one more light bulb on or turn one more light bulb off in the face of energy and food costs rising at 25% annualized rates?

As far as external shocks, you're right. They can and will spike spot prices but I am (and so is my money) with Ben in that those spikes will punctuate a downtrend.

-Mike J

Anonymous said...

good luck shorting commdodities in a hyperinflationary envirnoment.

Unknown said...

I recently discovered your blog, and really enjoy the content. Regarding specifics, you bring forth many valid points in the supply/demand analysis of commodities. However, remember that is just part of the story. The weak $USD, and the fact commods are the only asset class outperforming in a big way are also factors. Luckily, as traders we only need to guess the direction for our specific time frames. I'll only be long or flat commods for now, but not short.

Anonymous said...

As I said previously...oil is losing momentem not so much because of demand destruction ..but because cash is now becoming king. Big investment firms are becoming painfully aware that they cannot move money into anything and get the huge gains they seek so now they will just take the cash and wait for the next place to make 7%. I said it before..Goldman Sachs predicted $150 oil because of so-called " fundementals " What they really ment was " FUND " a mentals...they were going to move funds into oil to make it go to $150. So obvious.

Anonymous said...

Don't forget there will probably be a bubble after that... Treasuries.

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