Tuesday, August 12, 2008

There was no oil bubble.....RIGHT!

For the past year, as the price of oil broke through one big number after another, you could find someone, or, as oil reached $145, almost everyone, saying that is was not a speculative bubble. It was all fundamentals, as if suddenly in the past year China's economy had tripled. If you watch CNBC, which I love to do, you would see experts saying it was going to $150, $200.....oh, pick a number. And even the anchors on the network started to buy into the idea that increased speculation had nothing to do with it.

To me, this sounded like the internet bubble all over again (Yahoo is going to $1000!). When everyone believes something, and there are few naysayers, then you can be sure of one thing: there is a bubble, and it's near bursting. (Of course, I said the same thing when it $50, so how smart am I?) Remember, it was impossible for home prices to decline....everyone said so. What this type of chatter really indicates is that everyone has put in their money, which means there is very little money left to go into the market to rise prices higher. Once the decline starts, the amateur speculators run for the exits, while the pros switch to the short side.

As the price of oil skyrocketed, it was clear that those who might wish to go short were sitting out, not wanting to fight the trend. This meant fewer sellers, so the price had to rise with all the money bidding on contracts. Now the bubble has burst, and the shorts are back in, restoring some balance to the market.

How have things changed in the past few weeks? Look at the situation in Georgia ( the one the Russians are warring with). 2 months ago, all the market had to hear was the crazy leader of Iran say he hates Israel, and oil goes up $5 in a day. Now, there is a real war threatening an oil pipeline, and the price is actually down this week. In other words, the short term momentum players have found the momentum is gone, and have moved on to something else, at least for a while. Before, all news was bullish. Not so anymore.

Does this mean we will have $2 gas soon? Probably not. In fact, it could turn around again at any time. But, if you know how to read a chart, oil made a double top, and has broken through several key support levels, which would indicate a downtrend, so $5 gas is not likely this fall either. And the people who were sure the price of oil could never go down are losing their asses in a big way.

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