Monday, February 23, 2009

Has High Priced Oil Been Sent Through the Meat Grinder?

Great to be back! This should be a better week:)

The peak oil prophets saw the light once and are convinced that high-priced oil will return again - very soon, with vengeance. There will likely be some rise at some point, and when the world economy recovers, there's no doubt it will put some bite into demand. But $100+ barrel oil? This may take some time, and while the Chicken Littles wait, they will laughably be ostracized by mainstream society for (as they have for decades) crying wolf too many times over too many decades. Cut your bamboo rods, you!

Seeking Alpha had an interesting post indicating that, as opposed to what some market analysts and the so called peak oil "experts" have to say, this may take a while. Oil appears be a deflated athlete: it's artificial high price was pumped up like a Mark McGwire parade float on load-boats of steroid helium and HGH; and like the dot com bust, it may not be coming back, as this pinnacle float blew a leak wider than George W.'s empty skull, and flew off to space to never come back.

The article can be found here, and below are some bits:

Remember when Intel (INTC), Microsoft (MSFT), Dell (DELL), Lucent (ALU), Yahoo (YHOO) and Cisco (CSCO) ruled the markets? There was an era, roughly 1997 to 2000 when those stocks actually mattered...


And then, they just didn’t matter anymore. Once the dot com bubble burst, every bounce or rally in these names was basically a selling opportunity…for 8 years and counting! See the above chart for a notion of how frustrating it must have been to stay positive on NASDAQ tech names.


I believe that this story is repeating itself in the oil patch. Market participants seem to be in a state of disbelief that Chesapeake (CHK), Transocean (RIG), National Oilwell Varco (NOV) and ConocoPhillips (COP) aren’t important anymore. These stocks may have have seen the best levels they will ever see, at least for a long time.

When the credit crunch hit the hedge funds, we saw a raft of speculative money come out of commodities across the board. Then, industrial demand for oil literally disappeared from North America to China. These two events revealed to many newbies what the old school oil traders already knew, that commodities (and the related stocks) could be more volatile than what many were prepared for.


The oil names, in contrast, are trading at absurdly low multiples, in fact, the average PE ratio on the 18 oil stocks that make up the Oil Services ETF is only 5.08! This low multiple reflects the fact that last year’s earnings were peak earnings in this very cyclical business. Next year’s “E” is a giant unknown, but the market knows it ain’t going to stack up to when crude was over $100.

And so now, we will watch for years as these stocks grind it out in between the recent lows and the highs of yesteryear. In the meantime, investors on both Wall Street and Main Street will gradually come to the realization that the Chesapeake position they put on at 70 will not be break-even any time soon (if ever). In frustration, the hot money that came in but was too slow to sell closer to the top will come out, which makes all short-term rallies suspect in the entire sector.

And according to Joshua Brown, the old sow himself - T. Boone Pickens - may be placed out to the "pasture for slaughter" before oil hits $300 a barrel.

On a side-note, Ghawar Guzzler has been examining last year's oil production charts, and there's reason to be delighted: a giant oil glut appeared to be occurring right under our panicked $140 a barrel eyes; and the shocking part is - it could have been bigger. This news is in the works and plans are in place to post it this week. Happy days!

- Brewskie

1 comment:

  1. eToro is the ultimate forex broker for beginning and advanced traders.