Thoughts on the oil market

Anyone who has followed oil over the last few years knows that it rarely trades on fundamentals or even technicals. The oil price is simply a proxy for the stock market. Market up oil up and market down oil down. Otherwise you would have a hard time proving that the supply/demand relationship could justify oil prices rising to $147 in July 2008 and then crashing down to around $35 by early 2009. Then levitating back up to $82. A few experts will tell you it is the dollar which is impacting oil. Go back and look at a chart--the dollar index is roughly at the same level as it was in July 2008.

I thought it would be interesting to see the true supply and demand for oil, gasoline, and heating oil. The first chart will be the level of inventories and the second will be the price. You will not believe your eyes but you better because you are paying dearly.

Crude Oil Inventories

Price of West Texas Crude

It seems that the price of crude is rising at the same time oil inventories are increasing. You will also note that inventories are above the high range of historical levels.

Gasoline inventories

Price of Gasoline

Again gasoline prices are surging along with inventories. Current gasoline stocks are at a very high historical level. But that does not seem to matter anymore.

Distillate(Heating Oil) Inventories

Distillate Prices

No comment needed even if this is the most egregious example.

So what is causing this perceived inconsistency?

I don't know for sure but I have two theories. 1. Speculators are manipulating prices by hoarding commodities and therefore disrupting normal supply/demand. 2. The Federal Reserve's money printing has had its desired effect of debasing the purchasing power of the dollar. The probable answer is a combination of the two.

Why am I short oil?

Take a look at this chart and you will see why. This chart maps the COT (commitment of traders) report which discloses what the large players in the market are doing. You will see that the large speculators (hedge funds, institutions, etc.) are massively long oil while the commercials (producers) are heavily short. The majority of the time the commercials are correct and it usually pays to follow them. We will see how this plays out over the next few weeks.


Black Swan Insights


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