Option Investor

Another Week, Another Record

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OPEC met and decided not to increase production or cut production as some members had wanted. Crude weakened slightly only to blast off again when inventories declined slightly in Wednesday's report. After seven consecutive weeks of inventory builds totaling 25.8 million barrels we get one week of declines and the price exploded to $106.50. Obviously there was more to the story than that but you get the picture.

Weekly Inventory Table

Helping to fuel the run to a new record was comments from Hugo Chavez and some interesting information found in that raid of a FARC camp in Ecuador. Reportedly the Columbian troops recovered computers that had files detailing an offer by Chavez to pay $300 million in oil profits to FARC in return for stirring up trouble in Columbia. Chavez is supposed to have offered them a portion of the Venezuelan oil they could sell for a nice profit.

When news of the find was reported Chavez immediately called it a bunch of lies and broke off relations with Columbia. As the firestorm grew he warned that an attack on Venezuela by Columbia or anyone else (America) could send oil prices to $200 overnight.

There is nothing a skittish oil buyer hates more than the thought of conflict in an oil-producing nation. Even though Chavez is thought to be more bark than bite the price of oil climbed sharply.

The problem is the state sponsored terrorism by Venezuela if these charges turn out to be true. Reportedly $50 million had already changed hands. Chavez has already been caught trying to buy 50-kilograms of enriched uranium in order to make a dirty bomb. By funding FARC, a terror group that already rivals al-Qaeda in depravity and is on every international list of terror groups to be taken out, Chavez set himself up to be taken out by the U.S. or the U.N. As a state sponsor of terror he is actionable on almost any legal front. With Chavez in the crosshairs now his ranting and threats to cause an oil shock will only get worse. I am sure he lost more ground in the Exxon battle now that his credibility has been damaged even worse.

The U.S. imports 1.3 mbpd of oil from Venezuela. There are calls from various groups this week to halt those imports for as long as Chavez is in power. Since this is heavy oil and cannot be refined easily anywhere else on this side of the world this would put Chavez in an immediate cash bind as he raced to develop new outlets for his oil half a world away and at a substantially lower price. The price of crude would go up initially but it has been going up daily anyway. The U.S. could release 1.3 mbpd from the strategic petroleum reserve until other sources could be acquired to replace the Venezuelan oil. It would be an easy way to get rid of Chavez

I heard an interesting theory on why oil prices keep going up. We keep hearing about these sovereign funds from places like Saudi Arabia, Dubai, China, etc. They have hundreds of billions of dollars to invest. For Saudi and Dubai they also have oil to sell and some ability to directly impact the price by production but more importantly by the comments of OPEC where they are major players. This makes oil futures the ideal investment vehicle. If they start going down they just fire off a few comments as OPEC members and watch it shoot back up again. With their billions to spend they can also juice the daily trading patterns with perfectly timed buys and then sell into the rallies. The system was never expected to be gamed by players with hundreds of billions on the table.

In the case of countries like China and their investment entity they could be simply riding the wave and accumulating those futures contracts to offset future crude needs. If you know you will need 5 mbpd in Q4 and prices are rising then buying futures now hedges against any future price increases. Russia would also not be immune to the challenge of gaming the futures to juice prices for their oil. As long as oil is plentiful the game would not work. With spare capacity growing slim and fear in the markets it provides a fertile playground for the filthy rich. Lastly with stocks and bonds dropping every day the U.S. hedge funds have joined the commodity party to play in the only market that is booming.

I reported in the Option Investor commentary this weekend that Goldman Sachs had raised their projections for oil for the next three years. Goldman Sachs raised its average expected price to $95 for all of 2008, $105 in 2009 and $110 in 2010. Those are averages for the full year but their high end of the range is now expected to be $135 with possible spikes to $150-$200 if additional supplies do not come to market or we suffered a major disruption in some producing country. You may remember that Goldman shocked everyone two years ago with their $105 super spike projection. Looks like they were dead on with that projection and odds are good they are going to be dead on with their new projections. UBS said on Wednesday they could see oil prices over $150 by 2010 due to rising decline rates in older fields offsetting oncoming new production. Matthew Simmons, the investment banker from Houston who wrote Twilight in the Desert, was on CNBC on Friday saying oil prices could climb to $300 over the next few years. He did not put a date on it and it was obviously a tag line the anchor could use as a teaser. He repeated his comments about slowing discoveries, declining production and rising demand and warned of coming short falls and the crew on the set acted like he was an alien from another planet. They did not know what questions to ask or how to react to his predictions. I kept thinking, go ahead and laugh now because Simmons will have the last laugh sooner than you think.

This was not a good week for the portfolio. It is a bear market and the major indexes lost from 3%-6% for the week. I am tightening up the stops on the rest in case the January lows don't hold. If we suddenly saw some selling in crude along with the broader market it could get ugly. All of the positions now have stop losses.

Letters to the editor:

Hi Jim - I'm a subscriber of your Leaps Trader Newsletter and I wanted to write you about your latest issue. (March 2nd)

I'm seriously thinking about quitting the newsletter because of the unbearably negative rhetoric in your commentary. Without exaggeration, sensationalist comments like the ones below are making me lose sleep, and make me want to pull all my money out of the market and put it into CDs... (Reference to James Kuntsler and Mexico)

I find that rather than looking forward to the issue coming out every weekend, I'm now almost loathe to open the email due to the negativity. I think we all agree with and clearly understand your position that we're nearing or have reached peak oil, and I fail to see why comments like the above are necessary to make your point, especially in a market where the price of oil is rising steadily.

I just wanted to pass along these comments - I'm going to give it another week or two before I make my decision whether to stay with the newsletter, but I thought it would be appropriate to pass along a bit of feedback in case others are sharing my viewpoint. (Name removed)


First, thank you for writing and expressing your comments. I am sorry if I have offended you. I certainly hope everyone does not feel this way. I am very passionate about the coming disaster and when I start writing I get excited and quite often become too long winded. I believe most people who have heard the Peak Oil story accept it with a wink and a nod and think, "Sure, it may happen when I am old and gray." Even with $106 oil the realization may still be a long way off and reality has not yet struck home.

I firmly believe everything I write and feel it is my mission to educate everyone that will listen to me about the coming challenges to everyday life. We are talking about a life-changing event. I could ignore it or not write about it but I believe that would allow readers to put it in the back of their mind until one day at $150 oil, with high unemployment and a global recession and civil strife at home some readers would suddenly wake up and realize they missed the greatest investment opportunity of their lifetime. Even worse they will have failed to plan for their families future and be caught up in the maelstrom rather than watching it from a place of security.

I am going to open the question to the readership. If you want me to quit writing about the challenges ahead I will do it. If you are comfortable with my style and mix of current and future events then I would like to know that as well. Please email your comments to Jim (at) OptionInvestor.com. I have to write it that way to avoid the spam robots. Let me know, your feelings are important to me.

Jim Brown

April Crude Futures Chart - Daily

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