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Commodity Run: Everyone Wants To Know If It’s Over Or Just Delayed… 20s Money Weighs In

11 September 2008 11 Comments

Oil is down around $100 after peaking at $147. Natural gas is down 50%. Some of my favorite stocks, namely Chesapeake Energy (CHK) has gotten CRUSHED in recent days. Clearly, the commodity run is over. Or is it?

Is it possible that we are in a correction on the way to a continued run in commodities? Possibly reaching even higher highs than before? Let’s take a look.

Most of the material out there today regarding commodities is just calling for more of the same current trend. Basically, oil and other commodities are going lower. These are the same voices who were calling for $150 oil as oil was trending higher. Pretty much just going with the trend that is in place.

On something with such solidified momentum as energy commodities (oil and gas), I like to differentiate between the “smart” money and the “dumb” money. The dumb money pretty much is defined as the investor that puts money into oil after the media talks about a new high in oil every single day. The smart money is selling oil as it hits new highs. The question is where is the smart money going right now?

Vegas Snitch has a good article on the commodity run that I’d like to quote:

Commodities are getting crushed, especially CHK, because every trader in the world placed huge wagers without any knowledge of commodity corrections. Once the correction began, the new money started to panic as they were not prepared for this. We see this all the time in commodities. New money getting chased out by steep corrections. This is the steepest commodity correction ever, because we had the biggest interest ever in commodities. Now we are witnessing unwinding of positions by people who didn’t belong in commodities in the first place. They are taking their losses by buying at the all time highs. And TRUST US: the long term macro believers who got in at LOW PRICES are adding to their positions as these fast money amateur traders are selling. Its not rocket science, but lets do it again.

What they are saying is that the dumb, weak money that went in as energy was peaking has then pulled out which has caused an even steeper drop in prices. The Snitch is also saying that “smart” money is buying back in. You decide if they are right or not.

A recent article from Zacks.com also talked about how a correction in commodities is actually good for a long term bullish scenario and will actually contribute to a longer run in commodities.  Here is a quote from the article:

We don’t think that the current pullback is the beginning of the end of the oil price cycle. Far from it, we think that the pullback is useful for the cycle’s strength and stability. While prices can weaken some more, may be go under $100 over the coming weeks, but we think that most of the price drop is now behind us.

As I have mentioned many times in the past, there are fundamental reasons that support the current oil price cycle. Supply and demand of this non-renewable commodity is barely in balance, and there is very limited excess production capacity (kind of a supply cushion) in the global crude oil complex. It is the absence of a comfortable cushion in the shape of a large enough excess production capacity that magnifies the impact of real or perceived threats to supplies, such as problems in Iraq, instability in Nigeria, or Venezuela, or fears about Iran’s nuclear ambitions. Hurricanes in the Gulf of Mexico are another wild card having a significant price impact.

While it’s difficult to forecast near-term oil prices, we certainly do not expect prices to go to the historical low levels any time soon, if ever. We expect a period of price consolidation around current levels over the coming days, give or take $5-$10 in either direction.

My Opinion

I think we have a ways to go in commodities. Some of the voices I respect the most are saying this thing is far from over, one being Jim Rogers. I think the fundamentals support a strong bullish case for oil for years to come and I think as long as oil is high, natural gas should continue to gain popularity as a more widely used resource.

If I think that this thing has a ways to go, it’s time to put my money where my mouth is. It’s time to put some money into this sector at the current levels. I’m already heavy in Chesapeake Energy (CHK), so I’m going to take a look at some other options in oil & gas. Any recommendations?

On a side note, is anyone else really annoyed that neither presidential candidate has addressed the Picken’s Plan? People are quick to criticize minor points from the plan, yet nobody has brought a real solution to the table. Why in the world are we not pursuing such a plan? Want to make a difference? Write your local representatives demanding they get on the Picken’s Plan.

The Future

It looks like either one of two scenarios will become reality. Energy commodities, namely oil, will stabilize and go higher. Should this happen, I will make a good amount of money because I’m positioned in a bullish way for energy. Also, if this happens, there will be a greater demand for energy reform in our country (hopefully in the form of the Picken’s Plan).

The second scenario is oil and gas will continue to drop down towards historic levels. I will lose some money because of my positions and our country will also lose. Why will our country lose? Because energy reform will immediately be put aside because we have “cheap gas” again. No energy form will be thought to be needed anymore until the next boom in prices which will be uglier and way more painful.

I’m hoping for higher energy prices, higher returns in my portfolio, and real long term energy reform for this country.

11 Comments »

  • Dusty said:

    For the past year I have been waiting for a chance to enter some new commodity positions. In my humble opinion that time is soon (OK it is actually now). In the coming weeks, I will be adding in small increments hoping to get a decent amount invested before the trends reverses back up.

    And yes, I am annoyed the neither candidate will talk about anything but how bad their opponent is. That truly irrates me!

  • kevin duffey said:

    I’m trying to find a chunk of money to invest in some energy stocks.. All my money is already invested.

    Perhaps, if the financials tank big time, I can sell my SKF position and re-allocate.

  • sbf said:

    T. Boone Pickens said last night on Leno that we have 150 years worth of nat gas in this country. What do you think that will do to the price of nat gas and the stocks? I think bring them both down. What do you think?

  • kevin duffey said:

    Hard to say, if the attempt is to get transportation off of oil and onto natural gas, then the demand goes way up which might offset the huge increase in supply?

    Whether the prices go up or down… hard to say. It would be beneficial to our country however since natural gas is cleaner and is abundant here. We’d keep dollars here instead of shipping them to non-friendly countries. Plus the technology already exists. We just need leadership to lead the way to building up the infrastructure.

    How can you argue against it?

  • sbf said:

    Nope, not arguing against it. It’s just a timing issue and who knows which way it will go. You’re right in line with “The First Billion is the Hardest,” and I’m his biggest fan!

    Chapter 1 Booneism #1: Don’t rush the monkey, and you’ll see a better show.

    It’s a good read.

  • kevin duffey said:

    Timing is everything, especially with the volatile commodities

  • uab said:

    Dont forget people…there are third parties running. the dems and repubs are two side of the same coin and neither has done anything meaningful for our republic in over 40 years. you arent betting on a horse when you vote, trying to pat yourself on the back for being on the ‘winning team.’ vote your conscience. which candidates are out there talking about true fiscal conservative ideas…check out the libertarian or constitutional parties. with this corporate controlled media you would never even know they existed. its time to wake up the powers that be and decide we dont have to just choose the lesser of two lame candidates.

  • torbjorn rive said:

    Have a look at Linn Energy – LINE ticker. They also pay out a hefty dividend I think.

    I use DEE.to (Delphi Energy (Canada) to trade swings which I bought into today – I think we’re in for a big move up before we might correct down to below 100 oil (but that’s for reassessment later).

    As for SKF – dude – I don’t think that we’re going to see another spike in that stock. Think of how badly banks and other such co.s have performed in the past few weeks, and where does SKF go? not very far. I got out recently at pretty sketchy profits (as in minimal), and I don’t plan to trade/invest in such an insider controlled sector again. That place is fucked. Stick to more widespread shorts like SDS, QID, and TWM when you think the time is right.

    …my one cent.
    -T.

  • torbjorn rive said:

    …if you want SKF to fly – you need to cheer the fall of BAC. 9% of SKF hedges against BAC, and the rest pretty much follow suit. BAC will not go down easily.