Great Calls on Oil

By: ispeculatornew
Date posted: 08.16.2008 (4:02 pm) | Write a Comment  (4 Comments)

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I have written quite a few articles about the speculation in oil over the last few months and I want to revisit some of those articles because I have been proven correct.

First, there can no longer be a debate about whether the excessive rise in oil futures was due to speculation or supply and demand fundamentals. It was obviously due to speculation. In fact, the last thing oil was trading on during its run was supply and demand.

Oil was trading based on the falling dollar, potential supply disruptions in Nigeria and Iran, and self-serving bullish calls (actually flat our pumping) from Morgan Stanley and Goldman Sachs (their hedge funds were long oil). When oil was making its run towards $150 traders were completely ignoring supply and demand fundamentals because demand destruction had been evident for a few months.

In fact, the peak in the price of oil corresponded to sheer speculation. There was a rumor that was floating around that Israel was going to attack Iran on July 4th. I wouldn’t be surprised if Morgan Stanley started this rumor considering they made the call for $150 by July 4th. In any case this event did not happen and the price of oil started to collapse almost immediately afterwards.

Another reason for the rise in oil was the hoarding of oil by China due to the Olympics. They had been hoarding oil to run electric generators to cut down on some of their pollution. This was never mentioned, however, when traders continued to pump oil due to what they said was strong Chinese demand.

In any case, I think the debate about speculation vs. fundamentals has been put to rest and the talking heads who completely disregarded speculation look pretty foolish now.

I also want to point out that I was very close to calling the top in oil. I wrote that oil was close to a peak on May 27. At the time oil prognosticators were still pumping oil and very few people were calling for oil to go down. However, oil did peak just a little over a month later.

I also mentioned in that same article and in previous posts that when oil did start to collapse that you should buy airlines. If you would have followed this trade and bought airlines at their lows you would have a huge gain. In fact, America Airlines, which was briefly a stock recommendation, has almost tripled from its low.

I just wanted to point out some of the great calls that I have been making that will not show up under my “stock performance”.

Disclaimer: I have no position in oil futures or the companies mentioned.

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4 Comments

  1. […] comment on the oil/airline trade that I have mentioned a few times (most recently in my post on my oil calls). I still think oil is due to decline but I think the easy money in airlines has been made. I […]

  2. Comment by Eve — September 2, 2008 @ 9:32 am

    You surely made good calls on oil and airline stocks.

    Today oil went down $7 and now it’s under $110, and surely all the airline stocks went up.

    I tried to get in at premarket but some airline stocks already went up before 8am premarket starting time, same goes other stocks. Who is trading before the premarket opens? Why is SEC allow some people get in before others can?

    Do you think oil will be under $110 for long? Is it possible to go under $100?

    Thank you and have a nice day

  3. Comment by admin — September 2, 2008 @ 4:13 pm

    Eve,

    Stocks can open significantly higher or lower than their close in the previous trading day if there is a development that will affect the stock price. In this case the hurricane didn’t turn out as bad as anticipated and oil dropped significantly. Therefore, airlines opened the day much higher than the price they closed at on Friday because investors put in buy orders at significantly higher prices to factor in the news.

    I think oil will continue to go down barring some major unforeseen event that will disrupt supply. I think it is possible that oil will go under $100 in the next month or so.

  4. Comment by Eve — September 3, 2008 @ 1:59 pm

    thank you.

    If you think oil will continue to go down, should I buy airline or retail stocks when they go down?

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