Here's what I'm pondering, tell me where I'm wrong. In the bearish scenario, the dollar continues to devalue in a severe way, even without internal inflation, oil stands to gain because as during the early 70's, OPEC nations refuse to continue to accept (from the entire world mind you) a stream of devalued USD. That equates to external price inflation, which ripples back home and causes internal inflation by the very fact that oil is a driving factor behind the delivery system of the entire U.S. economy, even when there is no economic growth (i.e., no increased domestic demand). In the bullish scenario (and I use the term lightly), a few things happen (maybe either-or, maybe both). One is that we start to see real growth, and thus an increase in domestic demand. If we see real growth, it will likely mean that the consumer is a stable factor here in the U.S., and thus we will again become a strong pillar for the Chinese export-driven economy. This of course means China's appetite for growth will increase even further (with a stronger support), and they too will increase demand for oil. Once again, oil prices will increase due to increased demand. One X-factor in both scenarios are production output. Leave those out for the moment, we can get back to that later. The other X-factor is event driven volatility as a result of tensions between the U.S./Israel/Iran. Runups to potential armed conflicts have historically caused spikes in oil prices (Yom Kippur war, Iranian Revolution, Iran/Iraq war, Gulf War, Iraq War). Ironically the Suez crisis didn't seem to drive oil higher, and true we can argue about what other catalysts were in place during the runups to these wars (weak dollar, see above). The point is, a potential conflict between the U.S./Israel/Iran in the mid-term/long-term future could likely cause a run up in oil prices, until the point in time when the resolution or even the decided action between the western countries is made clear. Given that any of these 3 scenarios are all possibilities, where does oil stand to lose? The one area I can see that kills oil is spiraling deflation, which could only be touched off by not just one rate hike, but a series of desperate hikes in an attempt to chase down significant inflation. So is oil priced right for a good long term play? P.S. The potential for dollar carry unwind would more likely hurt equities, and possibly precious metals, but not oil, right? Looking for all opinions, agree or disagree? Where am I going wrong?
I didn't quite read everything you wrote but I read enough to know that I disagree totally. oil is in fact the WORST play for both bullish or bearish scenarios. the fact that oil is under $80 while everything else has been engaged in non stop partying should tell you something. first of all, on a fundamental basis, there is just enormous surplus in the market right now. second, with new technology oil usage will likely drop considerably in the next few decades. from a pure trading perspective, oil is doomed. what do you think is going to happen when the market pulls back? if markets retest lows oil will be right back below $40. if markets keep going up then oil will be dragged a bit higher, maybe to $90 or something but definitely not more than that. that's only if market goes significantly higher and if it does then there are many other plays in which you can make a lot more money. I think in 2012 oil will be chopping between $10 and $20.
OK, well, I appreciate your input, but maybe read my entire post? You mention new technology that will drive down demand. What technology is that? There is a tremendous amount of infrastructure that exists and runs on oil. That's not going away any time soon, even if the number of people driving a Prius doubles between now and 2010. I also think that Cap&Trade is also falling to pieces before our very eyes (thankfully). I'm not saying there will be no innovation, but enough innovation in this tight credit era to dethrone oil in the next several years? Second, you mentioned surplus. I'm interested in reading more about this. Do you have a link on where to track this? Last time I checked oil was in contango, and a lot of players in the physical market were buying it on the spot market and storing it in freighters until they need it. Why would it be in contango if there was a glut of it? You mentioned retesting this and retesting that. Well bottom line is they will retest based on macro fundamentals, so what are the macros for these scenarios of $10-$20?
I don't think fundamentals will play a price in what happens to oil in the next few years. this may seem outrageous but look at what happened just last year. a drop from $147 to $32 cannot be explained in terms of fundamentals. whatever is happening in all markets right now is purely an inflation/deflation story. the reflation trade has been on since March and if/when we get another leg down there will be another deflationary spiral down. of course, there are fundamental factors to consider but they pale in comparison to the inflation/deflation story.
I heard not to worry about inflation, that's what some are saying, just like I remember them saying sub prime was contained and the credit crisis just came and left in 12 months. All this money printing around the world is going to create great inflation.
Exactly. We already have inflation by some people's calculation. And by "some people" I mean our own definition of inflation prior to Bush 2 taking office, as redefined by Clinton: http://www.shadowstats.com/