Oil Market Near Major Decision
The Sensationalism is Overwhelming But Supply Rules the Roost
The politicians, the mainstream media, and the usual handwringers are having a field day, as the Drudge Report updates oil prices and runs oil headlines regularly.
Yet, history clearly shows that any market where the mainstream media and Washington are suddenly at the top of the news is one that may be close to a top.
The question for investors is one of timing. During the 1980s, the stock market crash of 1987 took several months to develop, as stocks ran up starting in the spring and summer before the October collapse. Most recently, the dot.com crash came after a 13 month advance which nearly doubled the price of the Nasdaq Composite which topped near the 5000 mark.
A long term chart of the December crude oil contract shows that the current rally started somewhere in early 2003, and coincided roughly with the start of the invasion of Iraq.
A cursory view of a weekly chart shows that the key price area above which prices began to rise dramatically was $24 per barrel.
The slope of the chart began to increase dramatically in early 2004 as the $27 price area got taken out. Since then prices have steadily increased in very steady waves of advances broken up by occasional pull backs and consolidation.
Most markets that are at the end of their run will have what in technical analysis terms is known as a parabolic chart pattern, which means that prices rise almost straight up. The advance in oil is still showing no signs of a parabolic rise.
Watching The Polls
The politicians are starting to focus dramatically on the price of oil with the Democrats blaming President Bush for the rise in oil and President Bush indirectly blaming the oil companies for a lack of investing in alternative technologies and for not increasing refinery capacity.
Perhaps the most dramatic display so far has come from Senator Charles Schumer (D.-N.Y.), who has called for the break up of the major oil companies in order to create competition.
Schumer made four points in a recent speech, which are worth noting, since they might mark a significant turning point in the overall dynamic of the oil markets:
1. "First, we have to dramatically increase conservation. " He offered no specifics, although these are common sense things such as keeping cars and trucks well tuned, filling tires at optimum air pressures, decreasing driving speeds, using mass transit, and walking or riding a bike when necessary.
2. "We need to develop new energy sources -- a crash program for alternatives, a Manhattan Project." This is kind of interesting, since it brings a new sense of urgency to the debate, and goes beyond, but certainly along the Bush rhetoric of late, which encourages solar energy, fuel cells, and ethanol.
3. "And we also have to reexamine whether having only a handful of giant oil companies can coexist with the needs of the American consumer and a rational energy policy in this country -- I do not believe it does. And so I'll be offering an amendment to the supplemental that will require a complete examination as to whether or not we should break up the big oil companies." Now you're getting somewhere if you're looking for signs that things may be getting over the top. This would be big time government intrusion into business, such as what happened to AT & T during its break up. That didn't work out so well, did it? Consider the fact that some 30 years and thousands of layoffs, bankruptcies, and the dot.com implosion, the offshoot of the break up of Ma Bell was that SBC grew into a Ma Bell like entity, and eventually bought the shell of Ma Bell, to become Ma Bell.
In other words, if we break up ExxonMobil, who's to say that 20 years from now, oil prices wouldn't be just where they are today, and that through the merger and acquisitions process of the market, we just wouldn't go back to having a different version of ExxonMobil anyway?
There is also talk of a windfall profits tax floating around. More than likely that would be a disaster as well.
So far, the only thing that all this drama has accomplished is that crude prices have consolidated.
This is complicated story which has been decades in the making. There are no quick fixes.
The laundry list of why the U.S. is at this current juncture is familiar and includes political as well as intangible factors such as the weather.
Externally, there are two major factors. First the geopolitical situation. The world has clearly changed after 9/11. Second, the U.S. faces competition from China, India, and other emerging economies.
Third, global oil production is decreasing, for whatever reason, artificial or otherwise. As we've said many times, the easy oil has been extracted, and although there may be plenty of oil left in the ground, it's either in places that are dangerous due to politics, or difficult to extract due to geological reasons.
The U.S. has not built a refinery in 30 years, due to the regulatory expense, put in place by Congress in response to the environmental lobby.
The damage from hurricanes Katrina and Rita to the Gulf of Mexico remains largely un-repaired as we stand on the threshold of yet another hurricane season which has been forecast to be as potentially devastating as last year's.
The phase out of MTBE blended gasoline to ethanol blended gasoline is now in limbo as President Bush has proposed a moratorium on the switch in order to boost gasoline supplies.
At the heart of the matter, then, is supply, which is decreasing, and which is being influenced by geopolitics, logistics, or technological limitations.
A look at the general response of the public shows that although there is widespread discomfort, there are no gasoline lines, there are no riots, and the use of mass transit is increasing.
Bicycle sales skyrocketed in 2005, after the Katrina disaster and that price spike. Sales of hybrid vehicles remain strong.
The bottom line, unless something changes in the near future is that for now, there is no evidence that we have reached a top in the oil market.
However, if consumers start to pull back as they fear further price increases in gasoline and heating oil for the winter, the economy will likely start to stagger.
With OPEC and other producers still pumping full tilt, we could then reach that point in which demand decreases as supplies remain at reasonably high levels.
If and when that happens, we could see a major top. Until then, we are likely to remain in the same overall pattern that we've seen over the last three years, a steady climb toward higher prices punctuated by occasional pull backs, with the maintenance of the long term up trend remaining intact.