I have felt that the oil market has been unnecessarily inflated (due to the capital speculating in the space) for a number of years. In fact, I am fortunate that I didn’t make a move to short oil when I felt we were beyond a level that seemed right. As they say, don’t fight the tape.
Once oil cracked $55, it felt way overvalued, beyond $70, a bubble. This oil market that we are in comes with the support of a LOT of capital. The capital appears to be providing an artificial prop for the price of oil and this trend doesn’t look to be changing. That being said, if I am your contrarian indicator, now is the time to jump in and short oil.
Paul Tudor Jones has this to say about the state of the Oil market:
Q: Is the price of oil high for fundamental reasons, or are hedge fund managers and Wall Street driving it up?
PTJ: It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products. Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.
Take it for what it is worth. Is oil artificially inflated, I believe so.