Thesis Buying 101 in Oil - Even "Experts" Mock It

I absolutely love this short story on oil prices from the AP, it highlights one of my favorite themes... i.e. thesis buying. So many on Wall Street love to use the excuse that "price action" is "foretelling" some future event; that markets are so efficient and "all knowing of what is coming 6-9 months ahead". You will hear so much of that in the year ahead on every rally. Just a few examples of excellent predictions the market made of what was coming "in 6-9 months" (a) the S&P was at an all time high in October 2007, foretelling of great time to come (b) oil was at $145 last summer, foretelling of incredible global demand to come (c) banks boomed once the Federal Reserve cut interest rates in late summer to mid fall 2007, along with sovereign wealth fund injections showing us that their initial swoon was for naught and financials would be just fine in the months to come (d) housing stocks bounced hard winter 2007-2008 foretelling of the housing bottom in spring 2008 (e) consumer related stocks boomed late summer 2008 as gasoline prices fell from $4.00 to $2.50 since rebate checks and "the gas tax rebate" would flood Americans pockets with new dollars to be spent. I could go on and on, I have 50 more where those come from. Just know, I believe the whole market efficiency theory to be a big fallacy.

So now we have oil ramping... personally, I am enjoying the dichotomy. It would be somewhat amusing to see the world where US consumers are paying $4 for gasoline and Europeans $8 to $10 as we face a global recession and rampant worldwide unemployment. We can all look around and ask why?? It would almost funny in a very dark and sinister way. The speculators can say "not us!" - just supply and demand, blame OPEC!

There are 3 main ways to explain the bouncing affair in oil

1. I believe the global economy will rebound in "6 months"
2. I believe inflation will make a return "in 6 months" as central banks flood the world with fiat currency (but in that case gold should run side by side with oil)
3. Hedgies and daytraders want to find something to play, and heck why not oil! It's all just numbers on a screen - who cares that the largest consumer on the planet has nearly 20 year highs in inventories and most developed countries economies are contracting at unheard rates in modern history

You can guess which camp I am in. But of course "the price is telling us something that is coming in 6 months". Thesis baby.. .thesis.

• Oil prices hit a new high for the year Thursday and retail gasoline rose above $2 per gallon for the first time since November as investors wagered that there would be a new run on crude stocks. Benchmark crude for May delivery rose $1.57 to settle at $54.34 a barrel on the New York Mercantile Exchange. Gas prices last hit $2 on Nov. 20.
• Analysts have struggled to explain the recent surge in energy prices, especially as reports continue to pour out from the federal government showing that the U.S. economy is shrinking and its oil inventories are bloated with surplus crude. Investors seem to have shrugged off the government data and have been bidding up prices on the expectation of a future shortage of crude oil, analysts said.
• Stephen Schork, an analyst and trader, said a lot of investors are getting swept into a new run on oil stocks even though there is little to support rising prices. "With global demand in the doldrums and the world swimming in oil, the current price run in oil is an aberration," Schork said in his daily oil report. "We do not think it will last ... in a logical world."

Ah, but logic has very little to do with speculation Mr. Schork.

• Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said the traders are jumping to oil now, but it won't be like last year. "This is not the beginning of the next great oil price shock," Kloza said.

Now EVENTUALLY due to current malinvestment, tight supplies (once the globe returns to somewhat normal) will lead to higher prices (great story on this here at WSJ) - but people love to make bets way in advance "anticipating the turn" ...

• A plunge in oil exploration will make it even tougher to quench the world's appetite for petroleum in the future, experts said. "But that's still several years away," said Andrew Lipow, president of Lipow Oil Associates. By cutting so much production, OPEC and other oil producers have the ability to meet even a huge jump in demand, he said.
• Japan, which said exports plunged by nearly half in February, will release a quarterly business sentiment survey called the "tankan" next Wednesday that experts say is likely to be quite gloomy. "Japan is the world's third-largest oil consumer, and the tankan is expected to drop to a 30-year low," Moltke-Leth said. "I see more demand destruction down the way."

Anyhow, I find it amusing... as I do the constant blather that prices signal a thing in this day of and age of "efficient markets". Unfortunately crude oil does not have a completely direct relationship to gas prices so even if speculators could somehow move crude back to $80+, it might be tough to get my $3.50-$4.00 wish for US consumers - in the middle of the worst recession since the 1930s. Ah, the dichotomy of it all, the Congressional hearings, the street riots... the drama - it would be scintillating.

But that's just me.