I hope you are making lots of money from the big oil stocks you bought when the blood was on the street.
I’ve followed my own advise I’ve written on forbes and done pretty well.
Its been a rough ride, but that is to be expected.
But its still not over yet.
What next for oil?
My thesis is the US is going to support the stock market and house prices come what may using the $5 trillion of QE it has bought to smooth the market. This $5 trillion turns into cash at the rate of $80-100 billion a month and is a powerful buffer against volatility.
This QE engine, combined with the EU’s, Japan’s and China’s should help the global economy to grow or at least stay afloat. If it goes wrong then inflation explodes. So the picture is mild growth or sudden inflation.
None is bad for oil.
Oil is its own growth driver and it has an underlying, natural equilibrium point which I suggest is $60-$80. This is an amalgam of what it cost to extract oil and what alternatives cost. Short and medium term it can go way higher or lower but that range is the bedrock of valuation for me.
Prices can be divergenct for a longtime but investment opportunities come when short term or medium term factors pull values away from the long term values that underlay in shorter term factors.
This is what market trends are all about, the interaction between short term pricing and long term pricing drivers.
Now theory says market moves are random and they are very random, but not all kinds of random are the same and are not created equal. Market random is not ‘random’ random. We cannot wake up in the morning and find oil is a trillion dollars a barrel. Because the market is not wholly random you find trends.
This is why we all look at charts. Is there in fact anyone who believes that charts are worthless because of randomness that they do not look at them?
This is my excuse for showing charts and I’m sticking to them.
So what next for oil?
The naysays predict the end of oil. I say never.
However that doesn’t mean the price couldn’t tumble back.
Then there is the possibility of the rally continuing.
So lets look at those possibilities:
So here are those two what ifs on the chart. The trends are just projections of the markets obvious gradients, the angles of attack of both bull and bear trends from the past.
This is the template I will be benchmarking oil against.
I’m long, as per my previous articles, big oil. Shell, Exxon and Chevron, with a splash of spicy midcap oil to give the results of a bull run some extra pop. As a spin off, the dividend yields are stupendous.
The big call is now, what about the world economy?
Time heals.
China didn’t implode. It stock markets are post crash and could take the next leg down without a global disaster that would have been triggered by a single massive drop. The crashes around the world of a few months ago have past and the markets once again propped up by the worlds central banks have regained their poise.
There is growth, however soft. The world economy is now floating in a post expansion of US QE and those carry trades are unwound. The primary commodity and oil crashes are over.
Recovery is underway.
That suggest to me the way ahead, at least for oil is up. I’ll follow my map and navigate accordingly.