Valero Foretold The Implosion Of Oil. What Is It Telling Us Now?

I've written on here quite a few times about Valero. The company was one of my favorite investments this past cycle. That is before its valuations reflected insanity. We highlighted numerous times in the late stages of the oil blow off that Valero was not responding constructively. And, it was telling us something. In fact, Valero was more closely following the underlying fundamentals we were writing about - that oil was coming out of our ears contrary to what peak oilers and talking China bobbleheads were telling us. China's energy use has imploded and global demand has followed suit. It was no coincidence there was unprecedented insider dumping of Valero stock by some of the savviest executives in the energy business. Massive dumping we wrote about while Valero was blowing to the sky. Even without an understanding of the fundamentals driving this environment, the signs were there if anyone was willing to entertain the data without bias.

Valero is still the same company it was six or seven years ago. It is an excellent company with excellent management. But the rules of the game, they are a changing. Many of the yammering crowd on Wall Street are now citing that commodities are bottoming and a new bull market is about to begin. And, may I ask what data supports this thesis? The widening spreads on gasoline or the price disparity in various oil markets are being used as a validation point by many that prices have bottomed. A fool and his money soon part ways. If one would have bothered to do a little research, they would learn that Valero's fundamentals are still deteriorating. Valero is running its refinery business at about two thirds of capacity and is actually shutting down complete refineries. A far cry from the nearly nonstop operations near capacity just a few years ago. And, a far cry from any type of stabilization in supply & demand characteristics.

While one might consider this cut back in production as positive, one might also consider such substantial cut backs as an act of survival. With fundamentals still deteriorating, there is no sign of a bottom in commodities. We've seen some type of stabilization in oil near $38 but this is a reflection of market technicals rather than any reflection on fundamentals. How do I know that? How was I able to write on here three years ago that oil would likely stabilize at $38?

What we have witnessed is already the biggest commodities crash in history. That's right. In history. A crash we uniquely and consistently said would happen. Regardless of the interim meandering direction in oil, expect the price bottom to drop back out of oil at some point in the future. I would suspect real pressure on oil will start to develop again in the second half of 2009 but that is simply a guesstimate of unfolding fundamentals. We shall see. Regardless of when, I still expect oil to drop to substantially lower price levels. That will likely start a new round of painful unwinding around energy businesses, firms with substantial commodities investment exposure and energy-dependent economies.