As any experienced trader will tell you, the goal is to cut your losses and let your winners ride. Automated trading and algorithms have removed much of the subjective component from trading, but there are still trading firms and systems that rely on human judgment.
Pride and oil-long positions don't mix
That component can lead to outsized gains but also large losses, the latter being the case if you believed oil had merely corrected from $147 per barrel to the $120 level this summer.
Energy Trader Jim Dietz, fortunately, was not one of those, but there were traders who established positions at $120, held on hoping that the psychologically-important $100 level would provide support (it didn't), then sustained major losses as oil crashed through first $90, then $80, then $70.
Oil, which fell another 64 cents Wednesday at mid-day, is now trading at $53.75. Dietz said all known, short-term oil bulls -- at least the smart ones -- are out of the market.
"The bear market in oil will continue through the spring of next year, at least, and we can now see what the $147 oil price was a leverage-fed bubble," Dietz said. "The dominant issue now is the demand side. We have year-over-year oil and gasoline use declines in the U.S. and if China's consumption flat-lines, we'll fall well below $50 per barrel." Dietz added that he was currently short unleaded gasoline and oil, with monthly contracts.
Further, the only demand-side factors that can stop oil's march lower, in Dietz' view, are a severely cold winter in the Northeast U.S. (where many homes heat with oil) and an increase in U.S. gasoline consumption. Based on research he's reviewed, neither is likely to happen: the Northeast will likely have a normal winter, and rising U.S. unemployment means gasoline sales are not likely to go up, he said.
Oil & Economic Analysis: As noted, lower oil and gasoline prices are two of the few positive data points amid a slew of negative macroeconomic data. Each $1 drop in oil increases U.S. GDP by $100 billion per year and every one cent decline in gasoline increase U.S. consumer disposable income by $600 million per year. Still, that should not deflect the new U.S. Congress from passing a coherent energy policy -- starting with the U.S. auto manufacturer rescue -- aimed at increasing auto fuel and industrial and residential energy efficiency, reducing dependence on oil, and ending once and for all the oil shock risk to the U.S. economy.
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Reader Comments (Page 1 of 1)
11-19-2008 @ 5:11PM
Scoopster said...
I say it's Karma, what goes around comes around. Look at the almost 80 billion dollars in profit within last 12 months per company, which came out of businesses and consumers pockets. This caused price of everything to go up, and thousands of business's to shut down including truck companies. All due to greed, What do they expect?
11-19-2008 @ 11:55PM
JCH said...
It has taken a near depression to make this Dietz character look even remotely close to correct.
He does not know what he's talking about. It was not a bubble.
Exploration is going to shut down entirely at $45. No exploration combined with the combustion of at least 65 billion barrels a year until recovery means a looming train wreck.
The equivalent of 147 will be eclipsed in mere months into the recovery, and for the same reason as last summer - supply, and its replacement, will be insufficient to meet demand.
It takes the a near collapse of the world economy to pop the bubble. LMAO.
11-20-2008 @ 10:09AM
Micheal said...
All of this economic trouble stems from the price of oil. People were paying all of their money to buy gas to get to work and other places; which means they did not have the money to spend on other things.