Dan's End of Year 2008 Report on Oil

Ok, given that I don't work on Wall Street but nevertheless have been boldly pontificating about my oil prognostications, I thought it only fair to present an "Annual Report". (check my previous posts for corroboration) - July 13, 2008 - I advised short-selling oil. short at the Oil Per Barrel Price: $145 instead of shorting oil directly you could have bought an "Exchange Traded Fund" (that shorts oil):  DUG (ETF) Price:$30.02 http://finance.yahoo.com/echarts?s=DUG - August 10, 2008 - I reminded you that oil would keep falling.  Per Barrel Price: $115  DUG (ETF) Price:$38.40 - September 8, 2008 - I advised you to "lock in your profits" and get out of that position Per Barrel Price: $105 DUG (ETF) Price:$40.72 YOUR ROI (had you taken my advice on this transaction): short oil 27.58% / buy DUG 35.64% - September 22, 2008 - I advised you to again take a short position on oil. short - Per Barrel Price: $120 or buy - DUG (ETF) Price:$35.74 - September 29, 2008 - I advised you to lock in your profits. Per Barrel Price: $99 DUG (ETF) Price:$42.58 YOUR ROI (had you taken my advice on this transaction): 17.50% / 19.14% Note: To be fair, I was foolishly conservative to lock in profits here. Who knew oil would drop from $99 to $38? (Certainly not me. That seemed like crazy panic unsupported by most fundamentals. It was as absurd as the run up to $147, at least to my eyes.) - December 2, 2008 - Despite the bad karma, I reluctantly advised you to BUY oil. Per Barrel Price: $47 alternatively you could have bought the opposite ETF "DIG" (which is long oil) Price: 27.91 http://finance.yahoo.com/echarts?s=DIG - December 31, 2008 - CLOSING PRICE FOR 2008 (as I check it at 5pm on http://bloomberg.com/energy/ ) Oil Per Barrel Price: $44.60 DIG (ETF): 28.89 YOUR ROI (had you taken my advice on this short oil transaction): -5.11% (LOSS) but it would have earned a positive ROI with the DIG (ETF) of 3.51% OVERALL ROI (had you taken my advice every time, compounded)... on oil: 42.25% (i.e. $10,000 invested would be worth $14,225 now) on the DUG/DIG (ETF) trades: 67.27% (i.e. $10,000 invested would be worth $16,727 now) By comparison: S&P 500...  on July 14, 2008 = 1228.30  on December 31, 2008 = 903.25 for a 26.46% LOSS CONCLUSION: if you had taken all of your money out of the S&P500 and wildly bet it all on my advice then you would have about twice as much money today (than if you had left it in the S&P500). "Gloat.Gloat." said the eccentric man who only bet his credibility since he had no money. <script type="text/javascript"     src="http://www.oil-price.net/TABLE2/gen.php?lang=en"> </script> <noscript> <a href="http://www.oil-price.net/dashboard.php?lang=en">To get the oil price, please enable Javascript.</a> </noscript> Summary: Ceteris Paribus (absent a global recession) I still think oil should be in the $70 - $90 range (in a "normal" economy) until the next big technological breakthroughs in solar/alternative energy/batteries. Reasons: 1) India & China are indeed increasing their oil consumption (not systemically going to slow that increase let alone curb consumption unless alternatives are viably priced - which will only happen with breakthroughs). 2) The same is true (albeit to a lesser extent) for the rest of the world. 3) Outside of the Middle East the cost of oil to extract & bring to market can be as high as $30 to $40 per barrel. Which means if prices drop any more, or stay this low for long, extraction will be reduced worldwide which will limit supply which will drive up prices. 4) Oil/Tar sands and other expensive extraction techniques are viable at oil prices of  $70-$90 per barrel (which is where I get my prognostication numbers). Any higher than that and supply will increase substantially which will drive down prices. 5) On the conspiracy-theory angle: Oil companies do not want "windfall profits taxes" nor do they want a massive federal investment in alternative energy R&D that will lead to the breakthroughs I mentioned. I can imagine Big Oil temporarily dropping prices to inoculate against those possibilities. (Before you say such market manipulation is impossible I encourage you to read about Enron just a few years ago or BP being fined numerous times worldwide for price-fixing over the years). Once the public is sufficiently distracted or if Big Oil companies see the federal R&D as unavoidable then I think they will scramble to earn as much profit as possible ASAP. Side note: I think BP's response was really interesting around the end of November (when oil was around $50) when Saudi Arabia's King Abdullah and oil ministers from OPEC members Venezuela, Algeria, Nigeria and Iraq said that an oil price of $75 a barrel would be a "fair" level that supports investment in new capacity. Get this -  BP's chief economist Christof Ruehl disagreed with their views, saying: "There is no fair price. There is a price, which balances demand and supply." WHY WOULD HE SAY THIS TO THE PRESS (even if he thinks it)? Why would an oil man say $75 is wrong when the current price is $50? I posit that he is setting up to rationalize prices well above $75 (maybe hundreds of dollars - where agreeing to $75 now would really haunt him and hurt his credibility). http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLSKH4zJGsj8 6) As I previously mentioned, the Middle East war "risk premium" is a giant factor in oil prices. If you think there will be more war in the region then prices will likely be higher. Less war and they will tend to be lower. I optimistically think Obama will have a lot of credibility in the region and thus there will be much less war. (which is why I don't think oil should ever be crazy high like $150). Obama's expected behavior is why I think the Israelis are doing such a major offensive now in the waning days of Bush. They want to take out their biggest obvious threats and look as scary as possible now. Israel knows that such a bellicose strategy will not be welcomed/endorsed by Obama (or at least not nearly embraced as much as the Bush administration has). Then Israel believes its recent strikes will enable more leverage in the upcoming negotiations with its neighbors. 7) Given that oil is so low right now, I would think there would be increased incentive (for airlines, other big transportation and industry) to buy long term contracts to lock-in these historically low prices. Such a buying spree will push up prices. 8) In light of the economic meltdown, however, everything has to be discounted. I think oil prices are hurt by $20 to $30 per barrel for this reason alone. The faster the recovery, the faster oil prices will rise. The slower the recovery the slower oil prices will rise. Ok, that's way too much to ask you to read given that I'm not a billionaire based on a multi-decade track record of consistently effective prognostications. But maybe this will be the first year of such a record. ;-) We should all be so lucky. Be well and good karma to you. - Dan p.s. I still want to develop my "cost of everything" economic theory in harmony with an "ecosystm/biosphere" metaphor should any of you big brains want to help me.