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By Robert Rapier on Oct 26, 2007 with no responses

Nothing Left to Give

The reason I am not a short-term trader is that you have that extra variable of market sentiment to take into account. Market sentiment can change in a hurry; it can shave the value of a stock by 50% in one trading session. In the longer-term, it is less of a factor and you can rely more on the fundamentals; i.e., there is less luck involved. So, I adopted a philosophy long ago that I would plan long-term, and ignore short-term trends. Those short-term moves can build wealth rapidly, but just as quickly destroy it. A lot of day-traders learned that lesson the hard way a few years ago.

In the oil markets, sentiment has changed dramatically since August, and this week’s inventory report saw another bullish shift. Prior to the report, oil had been drifting lower. But this week’s inventory report changed all of that. As I wrote on Wednesday, “I suspect crude will be off to the races again” and “this inventory report will provide a lot of fuel for the bulls for another week.” And in the past two sessions, oil has been sharply higher. If you were in the position to make an immediate trade following the release of Wednesday’s report, buying oil was a no-brainer for a short-term trader. But you have to be sitting in front of that terminal again next Wednesday, because a negative report will cause a fast sell-off.

In the wake of this week’s inventory report, you may have heard that crude set another record high yesterday:

Oil hits new record over $90

OPEC, which supplies about 40 percent of the world’s 84 million-barrel-a-day oil habit, agreed to boost production by 500,000 barrels in September, but the move did little to calm oil prices.

There had been speculation that the cartel would again boost production at its next meeting in December. One trader downplayed the notion that OPEC would increase production. “No one has any more to give us,” said Nauman Barakat, a trader at Macquarie Futures, the trading arm of Macquarie investment bank.

Of course following the statement that there is nothing left to give, the same trader contradicted himself:

While Saudi Arabia is generally believed to have the ability to pump about 2 million more barrels a day – the world’s only significant remaining spare production capacity – Barakat said they are keeping that in reserve in case of a real supply disruption.

I have long argued that we would find ourselves in this situation. In my first ever essay on Peak Lite, written a year and a half ago, I argued that we would find ourselves in a situation of higher and higher oil prices (which was the basis of my long-term strategy). The move up has been sharper than I expected, but has been exacerbated by speculators and a weakening dollar. However, I suspect these prices are here to stay. And if OPEC is really unable to boost production much more – as some suspect – then this is really just the tip of the iceberg. I wouldn’t bet that we will see $200 oil next year, but we could see $150 oil. If prices continue to ease higher, and OPEC doesn’t start boosting production significantly, the game will be over and oil will be on a run with no end in sight.

In the short-term, the direction of prices is going to be highly influenced by next week’s inventory report. Another large decline will probably sustain this bull market right past $100. However, if last week’s report was an anomaly (or a mistake, as OPIS suggested this week), then the rise will be arrested, and prices will await some other news for direction.

Back to OPIS, here was the blurb this week on the inventory report:

DOE statisticians have garnered a free pass for most of the year when it comes to petroleum numbers. Most of the criticism has been targeted at API or at the lofty demand quotes suggested by the newcomer on the block, the MasterCard SpendingPulse report.

But today, DOE is coming under some intense scrutiny by the physical traders and sellers that move refined products. That group believes that today’s surprising statistical bulletin is at best an anomaly, and at worst “bogus”. Many marketers also disagree with the notion that recent demand is exceeding supply. For at least the first ninety minutes after the data release, the paper markets regard the numbers as credible, with substantial across the board gains in petroleum.

Traders can’t quite come to grips with the 2-million bbl gasoline stock decrease, of which 1.2-million bbl occurred on the West Coast. The smaller 300,000 bbl decrease on the East Coast is attributable to the lower import number. Blendstock cargo arrivals have really tailed off in the last couple of weeks, but some weather delays were a culprit. Next week’s import number is predicted to go well back above 1-million b/d nationwide after this week’s low total of 838,000 b/d.

The distillate numbers were also questionable. Overall stocks fell by 1.8-million bbl and a drop of more than 3-million bbl in ULSD stocks was the major factor. That dip seems severe, even at harvest time, with some traders wondering whether a few exports might have been part of the mix. Distillate output also slumped, thanks mostly to a 193,000 b/d slide at the Gulf Coast.

That demonstrates the kind of hidden risk factors inherent in short-term trading. Was the report unusual? Yes. Could it have been an anomaly? Yes, we have seen those kinds of unusual moves before, only to see them undone the following week. And if it turns out that stocks are sharply up next week, I would take profits very quickly.

On the topic of speculators, I have just had an interesting exchange with a speculator at The Oil Drum. Like many of his tech stock predecessors, he attributes his success to his financial acumen and understanding, and yet at the same time displays a very faulty understanding of some of the “inside the fence” basics. But he can’t see this, because he is making money, and therefore he believes he is making shrewd decisions based on his special interpretation of news reports. More on that later, as the exchange provides a window into the thinking of a speculator.