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By Robert Rapier on Oct 29, 2007 with no responses

Shakeout Predicted

I have never heard of James Mound, but I think he is correct in his assessment below. As I have mentioned, I absolutely would not buy oil at these prices. It may still go to $100 in the short term, and clearly that sentiment is helping drive the market, but the fundamentals have not changed so dramatically in the past 3 months to warrant this kind of run-up:

James Mound’s Weekend Commodities Review

Energies

Strong selling ensued on Monday as a follow through to a bearish Friday close. The market suckered in a lot of shorts, me included, and then rocketed back to fresh highs amid growing geopolitical concerns. While the concept of peak oil (the end of the growth cycle of this limited life natural resource) is well supported, it does not necessarily support the current extremes. The market is in a short covering frenzy, overextended beyond what any normal relative strength scale would measure and setting up for a serious bull suck-in and shakeout. Look to the exchange for increased margins at these prices and watch the market come crashing down. Put plays are really the only remotely intelligent way to play the bear move, but if you are thinking of going long this market here just ask yourself if you are the last person to the party. Natural gas remains independently a good market for playing long call volatility as price expansion is likely in the coming months.

If inventories pop back up this week, you could see a quick sell-off. Ditto if Saudi convinces the rest of OPEC to calm the markets. I think upside potential is small in the short-term (but high in the long term) and the risk of a decline is large. If I was investing short-term, I would be buying puts here. It is hard to believe that the price of crude has moved 10% on the back of last week’s inventory report, but I said it would provide fuel for another week. Of course the other wild-card is whether interest rates will be cut again this week, as expected. If that happens, we could run up a few more dollars. But, I think investors have already factored in an expected rate cut.

I had mentioned writing a post on a recent exchange I had with a speculator. I will get that done as soon as I can, because it will give you some insight into the financial acumen of some of the people who are currently piling in.