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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, February 25, 2011

Oil Price

Fundamentals
I  turned positive on the oil price in the spring 2010 at $70 and followed it up by highlighting the
positive turn in relative strength for the energy stocks on 10/5 and 12/2/10. (There was a technical
case to go long oil per se before the spring of 2010, but I wanted to wait for an extended period
beyond the late 2008 cyclical low to see if the bust in the price would extend as it has often done
after very large price declines.)

The recent surge in the price of oil to $97+ bl. has brought it up to a level where it may be difficult
to sustain the price without a tight supply / demand situation that has some staying power. The Saudis
are saying that they can supplant the shut in of Libyan crude production which has come with the
hostilities there. This declaration has soothed the market in recent days, but if the Saudis do need
to push up production by 1.5 mil. bd to "cover" the shut in of Libyan crude, at least some oil
traders will stay very nervous. Yes, global carry stocks are high comparatively, but crude could
get scarcer at the margin if another OPEC mid-east producer of consequence runs into production
constraints because of the spread of political unrest. My point here is that there is $10-15 bl
vulnerability off current levels if a negative case does not play out and especially if Libya can
begin to right itself production-wise over the next couple of months. I would also suggest that if
there is additional turmoil surrounding production problems beyond the Libyan shut down, there
could be a rather dramatic political response from consuming countries who do not want to see
a bunch of NYC and London oil traders run the global economy into the ground by grandly kiting
the price of crude to lofty levels again. Do not kill the golden goose, boyz.

Technical
The oil price is moderately overbought on a near term basis and is extended relative to recent trend.
Given the volatility inherent in the price of oil, it would be silly to not  indicate that WTIC could
jump to $105 -110 bl. on speculation of a further tightening of global crude supply / demand
conditions. From a technical perspective, $110 oil would be a whopper of an overbought near
term. West Texas Crude chart.

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