Red-Hot Resources

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Wednesday, August 06, 2008

Thoughts From The Road

I’m still traveling (I’m in Colorado) and not watching a lot of news, but I thought I’d jot down some thoughts. Oil prices dropped below $120 per barrel yesterday as traders worried that high prices are affecting consumer spending, and the markets are probably waiting on the latest from the Energy Information Administration.

Since the markets are in a bearish mood, even news that would normally be seen as bullish will probably not push prices higher. Oil’s next support is around 116, and I’d expect that to be tested (perhaps this week).

So what kind of bullish news will traders ignore? Maybe the fact that rising oil prices haven’t hurt demand in China and India one bit. That, in fact, the EIA expects global oil demand to grow this year despite everything, even as supplies remain flat.

Or that car sales are soaring in China. In fact, GM sells twice as many Buicks in China as it does in the US — more than 330,000.

How about the fact that the bottom seems to be falling out of the ethanol market, with ethanol refineries closing their doors. While ethanol doesn’t replace a lot of gasoline in the US (ethanol provides less than 5% of our transportation fuel), remember that prices are made on the margins.

And then there are geopolitical forces the market is ignoring right now. On Monday, Iran announced that it has tested a new weapon capable of sinking ships nearly 200 miles away, and Tehran threatened (again!)that if it is attacked, it will close the Strait of Hormuz. Up to 40% of the world's oil passes through that strait.

But in the short term, the price of oil will go down until it finds support. I think oil is oversold to the downside right now, but that doesn’t mean it can’t get more oversold. The more oversold it gets, the better the bargains will be for the snap-back surge to the upside.


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