For the past little while I have kept a closer eye on energy. So I am thinking that maybe I should create a regular blog column about energy? If you like my previous blog entry at Investor Geeks, and liked my other articles regarding energy, please tell. And if you are interested, tell me what you would like me to keep an eye on and what questions should be answered.
In a previous blog entry I talked about the price of oil. A couple of days ago I was watching Boone Pickens on CNBC. He was commenting on what direction oil will take, and in his words, “I think you’ll see $70 before you see $50.” This was the same individual that said, “80 before 60.” History has shown that oil did not reach 80, even though it was only a few dimes away from 80. I am going to cut Boone some slack in that oil did reach 80 before 60, but I will take Boone to task in that he was also saying oil would reach 100 USD.
Now Boone is saying 70 before 50 and many in the industry including myself are saying the trading range will be 55 to 60. Actually, I am on record stating that oil will drop to 45. I am a bit hesitant that oil will reach 45, but am sticking to the trading range around 55. When Boone was making his comments Samuel Bodman part of the Bush administration made a comment that the price of oil does not depend on Boone, but the traders. I completely agree with Mr Bodman, and thus let’s look at what the traders are saying (1,2).
The traders are saying for the next three or four years we are going to be in a trading band above 60, and below 75. Look closer at the puts and calls, of Jan 2007. Calculating the strike price, the cost of the options and some profit the calls are predicting a price around or over 70. Looking closer at the puts they seem to be indicating a price in the low 50’s to low 60’s. There is a discrepancy in that the calls and puts seem to be far apart from each other, and that makes me wonder. I think the traders are hedging themselves using some synthetic option magic and thus they probably don’t care one way or the other. Or somebody is going to be loosing quite a bit of money.
What’s interesting is that North Korea is threatening the world, and yet the price of oil has not flinched. This tells me that bad news has already been discounted into the price of oil. Of course if there were something catastrophic the price of oil would sky rocket. OPEC seems to be rattling their quotas saber to increase the price of oil. Though one wonders if it will have any effect.
There is an interesting piece of news that seems to have had little coverage. The news piece is interesting because it says that the oil companies expect the price of oil to be above 40 for some time in the future, and that the Shell Oil president finds the price of oil at 58 high.
UPDATE: Oil broke the 60 USD barrier and dropped back down. Cramer thought that we should be bullish regarding oil prices as Exxon is bullish. As I mentioned in my Shell Oil example big oil is investing in oil projects assuming a price above 40. I think Cramer fails to realize that if oil stays above 60, with bursts above 70 a recession will result.
I want to address a comment made in a previous oil blog entry:
Good analysis, but you forgot something important.
what happens when the dollar is devalued another 20% and oil companies demand payments in euros?
it might not affect world oil prices but it will affect US prices. I’m betting on higher oil and gas prices. i think oil will go back up to $75/bbl within next 12 months.
The USD will not in the near future devalue 20% against the Euro. If this happens then the price of oil is going to be the least of our worries. My sister lives in Quito, Ecuador and for those that do not know, Ecuador is a US Dollarized country. Such a huge drop in the dollar would not only affect American’s, but also other nations like Ecuador.
To understand the scope of the issue let me tell you how many countries depend on the USD and Euro. America has trading bi-lateral trading partnership with Canada, Mexico, Europe, and most of South America. When I say bi-lateral trading partnerships I am referring to trade moving in both directions and not just a single direction. Trade with China is in a single direction and that is from China to the US. With countries where trade moves in both directions the US is exporting a significant amount of goods.
Look at the list of “fair trade” countries and notice that countries from the America’s and Europe top the list. With “fair trade” countries have an interest in not disturbing the relationship. Since most of the countries involved have a very close relationship to the dollar or euro a significant drop by one or the other would have devastating effects. EU industry leaders have said that the ECB should not pursue a strong Euro policy since it would hurt exports. Less exports mean less work, means less imports, means a slowing consumption. Thus there is absolutely no motivation for the ECB or the Fed to commence a currency war. I sooner think that the dollar and euro will have a trading range.