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…