Friday, April 01, 2011

Are We Due for a Sharp Correction in Oil Prices?

The old adage “you can pay now, or pay later” applies to the crude oil market here. You can ignore fundamentals for only so long. In the short term supplies don`t really matter to traders, but there comes a time when fundamentals in the market supersede political and technical based analysis.

In the end, fundamentals have the ultimate and final say regarding price direction in the market. And over the next month, fundamentals will dictate that Crude Oil prices correct to a lower level from current levels.

This correction would actually be healthy for the oil market, if this fails to materialize, and oil prices stay high with continuing oversupply and weak demand, i.e., an artificial mismatch between supply, demand, and price, expect an even “healthier” and fundamentally more severe correction when market equilibrium reasserts itself. _Dian Chu_SeekingAlpha
Dian Chu's reasoning is two-fold: First, she sees oil storage opportunities for long traders beginning to fill up, making it increasingly difficult for them to take delivery. Second, she sees the beginnings of a demand destruction developing in the US and beyond, from currently artificially inflated prices. doesn`t really matter what is occurring in the MENA (Middle East and North Africa), since over the next month at the next rollover, traders will have to sell any long positions because they cannot take delivery even if they want to.

Furthermore, because of the events transpiring in the MENA over the last couple of months, traders who normally don`t take delivery have taken delivery over the last two rollovers, due to ‘what if' scenarios where Saudi Arabia became a legitimate concern, and oil spiked to $130 a barrel. The fallout from this is that traders and investors who normally take delivery will not be able to during this next rollover, as there will literally be no more storage at Cushing.

...with these high prices we are starting to experience legitimate demand destruction. It seems with these high prices it is only a matter of time before we are again at the 368 million barrels of oil in U.S. storage facilities at the Commercial level. So the Oil Bulls can no longer point to Cushing as an anomaly, we are literally swimming in Crude Oil right now in the U.S. _DianChu
If you read the comments after Chu's article, you will find many peak oil doomers who have gone long and deep into oil futures. They are assuming that their years'- and decades'-old peak oil fantasies are irrefutable truth, and are staking much of their economic well-being on such assumptions and quasi-religious beliefs.

It is a dangerous game to play, particularly when so many crucially important factors involved are not open to public display and examination. Such persons eventually get themselves in so deeply that they are compelled to wish doom on their fellow citizens, just to prove they are right -- and to save their risky and poorly thought out investments.

Think of the futures market like a casino. Only bet what you can afford to lose.

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