Oil: Up or Down?

I was just watching the MacroTwits hour with Gregor Macdonald (@gregorMacdonald), and got to observe some very interesting banter about the hot topics of the day – SPX, USO, sovereign debt issuance, etc. But oil seems to be on everybody’s mind. General sentiment is that USO is ticking up, as both OPEC cuts and basic supply/demand forces it higher. As with US stocks, I also believe that oil is likely to tick up – in the near term. But I can’t help feeling that it is bound to fall before too long:

  • OPEC production cuts will not keep pace with falling demand. They can play this game for a while, forcing inventory drawdowns (as we’ve seen oil lose its contango and flatten out) and prices for near-term delivery to rise. But if my thoughts are right that we are still in the early innings of a global economic slow-down, OPEC won’t be able to cut fast enough to avoid inventories from building anew.
  • OPEC will not be able to hold its cuts, anyway. We are not in a situation where OPEC countries are rolling in cash and looking for places to put it. Every major economy the world over is hurting, regardless of their natural resources. A few more cuts and more than a handful of OPEC nations will be starving for hard currency, and will surely sell some extra barrels to generate that needed loot. And once a few defections are noticed, it will be come a free for all – and a free fall in oil prices.
  • There will be hundreds of billions of dollars globally deployed towards “going green.” This won’t have any near-term effects, but may impact the psychology of the oil markets over the next several years.

That said, once the inflationary cycle kicks in all bets are off – oil will take off like a rocket ship, and likely not stop until it is $200/bbl or beyond. What I am really talking about is the next 12-24 months. Oil is a very complex asset class with myriad factors impacting its price, and guys like Gregor are light-years ahead of me in understand the nuances. But from a simple-headed finance pro’s perspective it just seems that we are more likely to see $30 before we see $80. Time will tell…

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About Roger Ehrenberg 94 Articles

Roger is an active early-stage investor, having seeded or invested in over 20 companies in asset management, financial technology and digital media since 2004. Prior to his venture days Roger spent 18 years on Wall Street in M&A, Derivatives and proprietary trading.

Throughout his career he has held numerous executive positions, including:

President and CEO of DB Advisors LLC, a wholly-owned subsidiary of Deutsche Bank AG. His 130-person team managed over $6 billion in capital through a twenty-strategy hedge fund platform with offices in New York, London and Hong Kong.

Managing Director and Co-head of Deutsche Bank’s Global Strategic Equity Transactions Group. In 2000, his team won Institutional Investor magazine’s “Derivatives Deal of the Year” award.

As an Investment Banker and Managing Director at Citibank, he held a variety of roles and responsibilities in the Global Derivatives, Capital Markets, Mergers & Acquisitions and Capital Structuring groups.

Roger sits on the Boards of BlogTalkRadio; Buddy Media; Clear Asset Management; Global Bay Mobile Technologies and Monitor110. He is currently Managing Partner of IA Capital Partners, LLC.

He holds an MBA in Finance, Accounting and Management from Columbia Business School and a BBA in Finance, Economics and Organizational Psychology from the University of Michigan.

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