There's nothing like a US$140 reality check to start your day. That's what the oil price reached overnight in NYMEX trading. But before you go predicting US$200 by the end of the week for a barrel of crude, a quick story down the digital memory lane.
On January 4th, 2001, Yahoo stock (NASDAQ: YHOO) climbed over US$500 in intraday trading. It closed below that. But just a few months earlier one of our colleagues had speculated that YHOO was cheap at $400 and fairly valued at $500.
Yahoo was a stock everyone respected (whatever that means). It was safe to like. And it was not some start up Internet outfit. Everyone used it and everyone liked it, even if no one was sure how much advertising revenue search engines would eventually generate for shareholders.
Our colleague's price forecast wasn't based on any metrics that we recognised at the time. He was using what everyone else was using, eyeballs, page hits, clicks and all the buzz words that Internet companies used to justify astronomical multiples to trifling earnings (when there were earnings at all).
Yahoo shares were so in demand that the stock split 2-1 in February. A month later, the high was in for the NASDAQ at 5,048. It closed yesterday at 2,321. Yahoo has had its own troubles since then. It's now a US$20 stock.
Is oil the new Yahoo? You can make a good argument for higher oil prices based on how tight the supply chain is. But right now, the oil price is going up on just about any little rumour. The market has ceased to be rational about it. Even oil insiders are trading predictions about how high it could be by the end of the year.
But maybe-just maybe-we saw oil put in its high for the year over-night. Mind you, we remain a long-term energy bull for those very same unfavourable supply-demand dynamics mentioned above. Based on our experience, though, this is a market that feels really toppy. Our intuition is that you could see oil put a top in sometime in the next week, if it hasn't already happened.
Not that you want to step in front of a moving truck. Markets can remain irrational longer that you can remain solvent, the old saying goes. We're not suggesting you bet against oil. But we are suggesting you take note of the sentiment. The bears have almost totally capitulated. The bulls are being whipped into froth. When any little thing drives the price higher, you have a very dangerous market.
Dan Denning
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- Your Second Chance to Escape the Bear Market
- The Danger of Peak Profits
- Oil’s Out…Clean Energy Is In
- The Divergent Paths of Growth and Human Progress
- New York Will No Longer be Among World’s Five Largest Cities
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Smack MacDougal on 28 June 2008:
Exactly how has "The market has ceased to be rational about it."?
Folks who buy futures contracts long do so because they cannot find alternative places to bet their cash for long bets.
Stock Exchange casinos seem to be crashing (less money coming in than going out) everywhere -- the US, China.
U.S. Treasury yields don't pay.
Oil seems to be a life-blood for an electrified, motorized world. Large-scale substitution effect has yet to materialize.
The Global Glut of Money in Circulation relative to New Commerical Credit must go somewhere and it seems to be pouring into oil, foodstuffs -- the life-sustaining materials.
Folks who play Futures Markets, such as NYMEX contracts, don't bet on spot, they bet on future.
Until new places for money arise -- new capital (selling money down now for right to collect a future stream of money) for sale, no man should expect to see a drop in Life-Sustaining Commodities (oil, foodstuff), especially since oil and foodstuffs exist in a positive feedback loop.
Comment by Curt on 28 June 2008:
You're probably right. I don't see oil going much higher this year, but it could reach 200 in the next few years if the fed continues their craze monetary policy.
Comment by Karl on 28 June 2008:
You have to ask the question, how much of the price increase in oil is purely because of the devaluing of the currency its priced in? If you take that away, how much has oil really increased in value? I remember a discussion pricing oil in gold and there wasn't much of an increase, but that was several months ago.
If any small excuse will cause oil to rise, conversely will any small excuse cause the dollar to fall?
Comment by beyondtool on 29 June 2008:
I don't think it's time yet to count chickens. Oil has a long way to go before prices stabilize. It's a key resource and there ain't enough of it to go around. $2 a liter in Australia is still cheap.
Comment by Merv Nash on 30 June 2008:
You are all wrong.
There's plenty of oil yet still to come. Saudi is only getting started to deliver their reserves:
http://biz.yahoo.com/ap/080629/saudi_giant_oil_field.html
and Canada has trillions of barrels in the Tar Sands that everybody has been screaming about.
What's your problem? A bit of a price hike for a couple of years while Saudi and Canada raise the funds (seeing the banks are broke) to pay for the equipment to get it to market.
Have a nice day
Comment by Tom on 16 July 2008:
The sea also has some new oil resources. But in the next two centuries we have to find an other alternative to oil. I think hydrogen fuel cell is best. We can not get around it!
Pingback by Oil Hits New Highs… But Could Its Run Be Done? on 4 November 2008:
[...] Source: Is Oil the New Yahoo: Oil’s Run May Be Done addthis_url = 'http%3A%2F%2Fdev.contrarianprofits.com%2Farticles%2Foil-hits-new-highs-but-could-its-run-be-done%2F3318'; addthis_title = 'Oil+Hits+New+Highs%26%238230%3B+But+Could+Its+Run+Be+Done%3F'; addthis_pub = ''; Tags: Crude Oil Prices, Dan Denning, Investing In Oil, YHOO By Dan Denning [...]