Wednesday, January 17, 2007


In early August 2006 the oil market hit a short term peak as a confluence of shocks hit the market: Israeli-Hamas trouble, Israeli-Hezbollah fighting, Iranian nuclear fears, hurricane season approach, plus the ongoing Nigeria and Venezuela problems. With all these fears, prices hit $80 and ran out of buyers. I believe that fear-based buyers had just all bought all the protection and inventory they needed. Oil inventory levels were high worldwide. How much disruption inventory protection is needed? It seems like there was enough in August 2006.

The oil markets have been sliding every since on fear dissipation/rationalization of inventory levels.

In my opinion, the rapid fall in the first two weeks of this year has been caused by (1) asset allocations away from oil and commodites; (2) commodity index rebalancing; and trend following commodity fund selling. There were no big buyers to offset these large sellers as no short-term bullish news occured. Also, OPEC resolve is being tested by traders. Since yesterday's comments by Saudi Arabia indicates they will not be a patsy for other OPEC cheaters and bear all the cuts; traders saw less risk of quick near-term OPEC action.

Winter seems to be returning with vigor and one good forecaster has the overall winter being near normal, with early warmth to be offset by oncoming below normal cold.

Demand numbers in the US show continued year over year increases. India & China continue to increase demand.

The recent drop will scare exploration teams causing them to be more conservative in selecting drilling projects.

I am re-mounting crude trading positions, averaging in slowly. Weekly XLE chart shows a higher high and a higher low, IFFF the current level holds. So long term oil stock plays are still on - keeping all for long-term capital gains. If trading these, follow the "buy dips, sell rips" method. This is a dip. The asset allocation moves should be finished now after two weeks.

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