Friday, December 26, 2008

What's Up/Down with Oil?

Thank you, readers, for your many holiday greetings and comments. I am overwhelmed with family obligations for the next week and will do my best to reply in the first full week of January. Entries will be sporadic until then.

Even as oil relentlessly declines in price, the value of oil/gas companies has been rising for months. Why is that? Is the market discounting the continuing decline in oil? Or is that decline misleading/bogus? Whoever gets it right will profit.

One key tenet of is that we as individuals have the opportunity to grow our capital/purchasing power with prudent investments, speculations and hedging. Even if someone only has a few hundred dollars in cash capital, that amount can be profitably put to use via options (puts or calls) which each control a hundred shares of the company's stock (futures contracts and other trading vehicles are also available to small speculators).

As always, please read the HUGE GIANT BIG FAT DISCLAIMER below before proceeding. This is a free website and it offers the opinions of an amateur chart-watcher (me), NOT investment advice.

Even as the ship of state and the global economy falter, some will retain more purchasing power than others. Why not make it "us" rather than "them" who grows our purchasing power?
Which brings us to oil and the rather striking divergence between the price of oil as a commodity (dropping) and the stocks of oil companies (rising). Either the people buying shares of oil companies are betting oil will soon stop declining and start rising, or they already know the price of oil is artificially low.

Let's look at two charts:
Please go to to view the charts.

The charts are self-explanatory: even as oil continues declining, stocks like APC put in a bottom months ago and are forming very bullish divergences in MACD and a flag or pennant which looks rather likely to break out to the upside. (Disclosure: I made a little money trading APC and VLO calls in the past 2 months, and I just bought APC calls on 12/24/08. I also own APC and VLO in my paltry IRA account.)

I come now to one of the most important articles of 2008. First brought to my attention by frequent contributor U. Doran, the topic was addressed by my esteemed colleague Jesse at the Cafe Americain. The article explains why oil futures do not reflect global oil realities. Light sweet crude is priced upon delivery in Oklahoma, and as a result the price does not reflect the realities of demand elsewhere in the world or the availability of oil globally. The CFTC Is Failing to Regulate Commodity Market Ponzi Schemes.

Here is the source document, via Reuters: NYMEX oil benchmark again in question.

I don't know the true state of oil supply and demand globally, but the stock market is indirectly suggesting that the NYMEX price of oil is not reflecting the reality of the global market. Why would oil stocks bottom in mid-October and start edging upward even as the price of oil plummeted? Why was there such a huge difference (contango) between the price of oil to be delivered at the close of the December contract and the price of the January contract?
Many citizens are questioning the numerous disconnects between the futures markets in precious metals and commodities and the realities of global supply and demand. As the saying goes: keep an eye on the referee. Maybe this match/game isn't quite as fair as it's advertised.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

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