Is The Oil Bubble About To Crack?
Timing a top for oil has been a fool's game. And, I have been a fool on occasion. Oil has been much easier to trade as opposed to picking a specific top. There is so much speculation in this market that it has taken on a life of its own. But, bubbles always disconnect from fundamentals and that is what has happened with oil. And housing and private equity and emerging markets and derivatives and and and.
Gasoline has disconnected from demand. Gasoline has disconnected from gasoline-related equities and now we see the chart below where demand is disconnecting from oil-related equities.
The only plausible rationale for oil remaining elevated through a substantial economic slow down is if global production drops and demand rises because the market speculators are going to run out of money. But, that scenario has not been representative of any facts about demand or supply to date. So, that is a purely speculative position. Given that such a position is purely speculative, as is everything else this cycle, and we are seeing a significant slowing in the global economy, there is zero evidence of such an outcome developing any time soon. Regardless of the incessant bantering, this is not what has driven oil to date. Nor could I ever believe traders anticipated this would be an outcome. Traders are paid to follow the trend and make money. Not to think. And, few likely understand commodity cycles other than what someone showed them on a historical chart. Which is why we have this bubble and why they are going to be punished severely.
The chart above shows the Amex Oil Index with a buying pressure algorithm superimposed on it. For the first time in this cycle, we have seen a large rise in oil stocks and the oil futures with buying pressure literally cratering. (When the red buying pressure algorithm falls below the blue horizontal line, that means there are more sellers than buyers. The direction of prices should also follow the direction of the algorithm. So, as an example, the December price breakout was not confirmed with buyers and ultimately failed substantially.) You'll notice we had a general equilibrium on the left side of the chart followed by substantial buying. And, now very substantial selling. Something very significant has happened. That is, prices are rising significantly without a preponderance of buyers. Not only that. But, it appears as if there are not any buyers. There was one other time this happened. That was the Nasdaq going into 2000. I am not comparing the two but is there anyone on this earth who believes oil is going to drop precipitously over coming years? Or oil stocks? Do more people hold the belief that high oil prices are nearly a guaranteed outcome than held belief in the future of technology in that bubble? I should think so because this is a global phenomenon. The technology bubble was mainly an American phenomenon.
Does that look like a head and shoulders pattern on the chart? With no buyers on the right shoulder?
Gasoline has disconnected from demand. Gasoline has disconnected from gasoline-related equities and now we see the chart below where demand is disconnecting from oil-related equities.
The only plausible rationale for oil remaining elevated through a substantial economic slow down is if global production drops and demand rises because the market speculators are going to run out of money. But, that scenario has not been representative of any facts about demand or supply to date. So, that is a purely speculative position. Given that such a position is purely speculative, as is everything else this cycle, and we are seeing a significant slowing in the global economy, there is zero evidence of such an outcome developing any time soon. Regardless of the incessant bantering, this is not what has driven oil to date. Nor could I ever believe traders anticipated this would be an outcome. Traders are paid to follow the trend and make money. Not to think. And, few likely understand commodity cycles other than what someone showed them on a historical chart. Which is why we have this bubble and why they are going to be punished severely.
The chart above shows the Amex Oil Index with a buying pressure algorithm superimposed on it. For the first time in this cycle, we have seen a large rise in oil stocks and the oil futures with buying pressure literally cratering. (When the red buying pressure algorithm falls below the blue horizontal line, that means there are more sellers than buyers. The direction of prices should also follow the direction of the algorithm. So, as an example, the December price breakout was not confirmed with buyers and ultimately failed substantially.) You'll notice we had a general equilibrium on the left side of the chart followed by substantial buying. And, now very substantial selling. Something very significant has happened. That is, prices are rising significantly without a preponderance of buyers. Not only that. But, it appears as if there are not any buyers. There was one other time this happened. That was the Nasdaq going into 2000. I am not comparing the two but is there anyone on this earth who believes oil is going to drop precipitously over coming years? Or oil stocks? Do more people hold the belief that high oil prices are nearly a guaranteed outcome than held belief in the future of technology in that bubble? I should think so because this is a global phenomenon. The technology bubble was mainly an American phenomenon.
Does that look like a head and shoulders pattern on the chart? With no buyers on the right shoulder?
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