Crude Oil Market Turning Point

There are three choices for the market in crude oil after its recent steep falls. It can stay roughly around where it is now, $62. It can fall back down through the technical and software barriers that support it to new year lows or it can go higher once more. Perhaps very high. It all depends who, or what, you believe.

If you believe the Dow Jones then there can only be one answer. That the market is robust, economic growth is on the move and the demand for goods and services is going to continue to suck up more and more crude oil. Equities are hot; the media is telling us corporations are strong.

» Source: Resource Investor

Then again maybe we should ask 32 year old trader Brian Hunter. He was the chief guy trading energy at hedge fund Amaranth. Last year estimates gave him a wage bill of somewhere between $75 million and $100 million and he was the hottest thing in, well, in hedgery.

But now we can see how easy it is for anyone, to get the market wrong. Remember we talked about how the perception of near-certain Gulf of Mexico hurricanes plagued the market. When the hurricanes did not arrive it was like the world had fallen off its axis. Combine that with the terrible news - for the markets - of peace in Lebanon and negotiations in Iranian nuclear issues and we had the big treble whammy.

Amaranth ended up the wrong side of $6 billion worth of losses on energy. We now know they were the highest profile casualty of the drop in the market place. It seems amazing that the whole $9.5 billion hedge fund may be sucked into liquidation on the back of the non-appearance of major storms. This commentator does not always rely on cheap shots. But what part of the word “hedge” did Amaranth not understand?

Amazingly, given the way jokers and liars proliferate in the market place Brian Hunter is no longer at the company. If we had known of his failings before we spoke about the non-appearance of hurricanes bringing down the price we could have called it Hunter’s syndrome. “Amaranth can’t comment on the specifics of his departure,” a spokesperson said. You bet they cannot. They would like to bet that they cannot, but they do not have any money left.

So if we want to sum up where the market is now you can turn two ways. To Dow Jones, or to Amaranth. Which one do you believe? Which one do you want to believe?

Right now we will stick with what we have previously said. If the Nymex West Texas Intermediate price breaks down below $57.50/$57 then Mr Hunter was wrong by an amazing distance. The price will fall until it is defended by OPEC and even some corporations. If the price sticks around the $61 mark - one we have been talking about for a while, albeit not this early in the year - then all we are doing is finding the new floor.

We could back up the bull argument with this. U.S. GDP growth for 2007 is predicted at 3%, Chinese growth comes in at 9.6% and global growth is at 4.7%. That is admittedly down on recent times but it is still healthy. If the forecasts are true then we are not going to see crude hit $100, outside of any real geo-political turmoil. But we could see oil explore the basic range between $60 or lower at $50 if something goes wrong and $80. That is until the big one.

The big one, the first time we have mentioned it, is the U.S. elections of November 2008. The U.S. administration and economics has come to dominate geo-politics and the market more than it has ever done before. In the run up to the elections there is no saying what could happen. The U.S. primaries will be more observed than ever around the world, which way will the Republicans and Democrats go? What will the effect be on oil? It is hard to say.

But in between now and then there is one possibility no one is really talking about, not a boom or a bust. But that energy gets stuck in a range. A large range admittedly, but one where we have a medium-term pause between $50 and $80. Let’s wait and see….

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