Oil Looks Ornery: Model Portfolio Update

• Gregor Macdonald
• February 3rd, 2010

For 14 months now those who’ve been bearish on the price of oil have pointed to very high oil inventories. And while it’s true that US inventories remain high, it’s quite clear that global inventories peaked between March and August of last year. Additionally, the price trend higher is now a year old. It started in the unsustainable depths of 35 dollar oil last Winter, which is not only too low to fund new exploration, but is too low to operate many high-cost existing fields around the world. Oil then derived strength from OPEC cuts, a strong rebound in Asian demand, and of course the peaking and then the tailing off of global inventories. As has been the case for years, US inventories only give you price outcomes on a 4-8 week basis. They are merely a piece of the whole.

I bring this up today because it’s possible the mid-Winter low in oil was just achieved in the past two weeks, as both fundamental data and policy threats converged to send most asset prices lower. If that’s the case, then the one month fall during January sets oil up to make its more typical double highs–one in late May, and another in late August. While I would agree that the US is always a good candidate to drive global demand lower, and, that OPEC does indeed sit on spare capacity, it’s not likely that here in early February that either of these factors…(this article continues for subscribers through the membership gateway, on the right side of this page)

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