Whether that happens or not remains to be seen, but any case of negativity on oil should be the last till oil starts shock news, writes Mukul Pal.
I had earlier made a technical and time cycle case for crude oil's last dip to $60 before it heads to $300, suggesting the commodity cycle was 30 years long and considering commodities worldwide bottomed around 2000, a continued upside of commodities, including crude oil, till 2015 was a possibility.
In May 2008, oil was so much on the market's mind that I got mails regarding oil hijacking retirement plans and top brokers soliciting me to buy call options. Oil then dropped to $39 and the second part of the forecast started to unfold from December 2008.
Now that the markets have awoken to the reality that pension plans get disrupted by sovereign risk rather than oil, brokers might have another strategy on the latter. In the new context, defending a May 2008 forecast is not easy. Still, for the non-believer, I will stick to plainspeak to address their queries.
Expectations
The story that above $125 dollar a barrel, renewables get attractive, quoted $50 as the inflexion point a few months before. The question here is how you can quantify that $300 can't happen before renewables are embraced by the society?
Thinking green does not just need oil prices to go up; it needs an extreme pain when electricity bills start to matter. And, that may not happen till society pays multiple times of what it pays for oil today.
It might be only then that we, the investors, might really care about global warming and have a desire to save the world. It will be only then we might think of switching off the LED of our computer screen and teach our children about energy conservation.
Another reason sighted against OIL300 is US energy self-sufficiency. Who judges the time till the US becomes energy self-sufficient? It took more than a few weeks to plug the oil leak. Estimating time is hard. And, a lot can happen till efficiencies come in.
Regarding the death of oil at $300, one should speak to Theodore Modis, futurologist. Assets don't die; they just become unpopular. How can you quantify when oil become unpopular? And, why can't it go to $300 before it starts to get unpopular?
In an older time, oil at $40 "scared" everybody, and then the scare shifted to oil at $100. Why can't it go to 'Oil$300 scare'? Oil at $300 is just a small aspect in the larger picture.
Assumptions
Another idea against Oil300 is that it can't happen because of demand and supply. Demand and supply is an illusion. Gold does not just move based on demand and supply of gold. It also moves in anticipation of markets across time frames, shorter to larger.
Gold also moves up in greed and fear. How do you quantify what's driving gold, greed or fear? Behavioural finance suggests markets don't know how to subtract and add. A majority assigns narrow intervals when it comes to targets. So, how can we measure demand and supply?
Credit crisis can't happen. Bankruptcies can't happen. Emerging markets correcting 60 per cent can't happen. Multi-decadal rise in interest rates can't happen. Food price rise can't happen.
Inflation can't happen. Illusions and contesting forecasts are easy, studying 3,000 years of interest rate history, studying inflation cycles, proving cyclicality as a mathematical science and separating the probable from the possible is very tough.
The real debate is to think what if crude oil at $300 was probable. Natural gas has already started moving up and we see further upside. Regarding near-term oil, we are still expecting a dip till $60.
Whether that happens or not remains to be seen, but any case of negativity on oil should be the last till oil starts shock news. We also would like to mention that we are making an oil case here, a physical commodity. How it translates to equity related to oil is an inter-market story.
The author is co-founder and chief executive officer of Orpheus Capitals, a global alternative research firm