The Psychology/Sentiment of Oil

I’ll be damned if I can explain exactly how this happened:

Last year, when Oil passed $40 on the way to $55, there was a resounding chorus about prices: Its only temporary, oil cannot stay this high, there was a $10, $15 even $20  terror premium built in.

Recall that The Big Picture repeatedly has disagreed with that sentiment.

Now, suddenly, its all but gone. There is an  eerie recognition from analysts and the media that oil will be pricey for quite a while — indeed, indefinitely.   

How does that happen? What is the group dynamic, the psychology, that allows such a shift to take place? Perhaps one can only be wrong for so long, continually losing your (or your clients’) money in the process until, well, there ain’t no more. When the not long and wrong crowd lose all their dough, their megaphones go away (that’s merely a guess).

Maybe this helps to explain the shift :

"When the second quarter of last year got under way, analyst forecasts called for energy companies in the Standard & Poor’s 500-stock index to earn 3% more than they had a year earlier, according to Thomson First Call. Earnings grew by 62% instead. At the beginning of the third quarter, the analysts expected earnings growth of 16%. They got 56%. In the fourth quarter, earnings grew by 101%, versus the 39% analysts predicted."   – Justin Lahart, Energized, Ahead of the Tape, WSJ

My bigger concern is:  Is energy becoming a crowded trade? When does the crowd turn into a mob? As in, when does this newfound appreciation of oil prices become a contrary signal?
Jim Cramer mentioned yesterday he was a seller of oil stocks, but IMHO
he’s  merely making a gut feel trade (also known as a guess). I need a
more concrete sell signal before blowing out.

Lastly, here’s a WSJ article on the subject of Oil Futures:

"As often happens during a crude-oil rally like the one seen in recent weeks, most observers are focusing on the price of oil contracts for immediate delivery, currently at $53.89 a barrel. In an otherwise fragmented global market, this contract provides a standardized benchmark. When professional traders, economists or families chatting about current events at dinner talk about the price of oil, they are all referring to the "front-month" contract.

Yet the market for long-term oil delivery has become more active than usual and is sending its own message: The real danger of a crude-supply pinch is months or years away, but expect a spate of generally high prices for the foreseeable future.

"I used to think, forget it, $40 oil is not sustainable," says Oppenheimer & Co. energy analyst Fadel Gheit, a 30-year industry veteran. "It has to come down from there. That’s what I was taught. But things have changed. The center line for oil prices is clearly moving up."


With this post, I am adding a new category:  Psychology/Sentiment. I reference it enough, and thought it worthwhile to explore the subject as a stand alone topic.


Ahead Of The Tape
Justin Lahart
WSJ, March 8, 2005; Page C1,,SB111022698887472539,00.htm

Message From the Futures: High Oil Prices to Stick Around
THE WALL STREET JOURNAL, March 8, 2005; Page C1,,SB111021882177972367,00.html

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  1. John commented on Mar 8

    The popularity of oils coupled with the big moves this ytd troubles me as well. I do think Cramer has a good idea in peeling some off, and have done so.

    However, I look at the underinvestment for over 20 years; the environmental blocks today; the greater difficulty in getting to new supply technologically… and an 8% SP weighting (vs. 25% 1981)… and I have decided to stay with at least a double mkt weight (down from triple).


  2. Eric in Detroit commented on Mar 8

    There are a lot of oil fields in Texas, Oaklahoma, and the Gulf that aren’t moneymakers at $22/barrel, but turn profitable at $40 plus.
    I wonder which domestic companies are sitting on the most dormant wells and about to spool up production…

  3. spencer commented on Mar 8

    The limit on oil is the price that brings on major new supply and at over $50 it is profitable to exploit the Canadian tar sands.

    That should create a major ceiling on oil.

  4. John commented on Mar 8

    But is it a ceiling or a rolling over point? I believe if prices are now in a range of 40-50 (as the Saudi’s seem to believe) that would allow for another leg up in the E&P stocks. And how long before the majors have to begin buying reserves (such as those Canada tar sands)?

    I am more concerned about an energy demand decline than a sudden surge in supply (for now). With economic lead indicators looking pretty solid seems continued rising demand is likely.

  5. dsquared commented on Mar 9

    I have been halfway between the two camps on this one; I thought that it was a bubble, but had basically nothing to do with terror. The US Government has been replenishing its strategic reserve, and this underlying demand has been magnified by hedge funds (if you know that there is a buyer in the market who is working out of practically unlimited resources and who is more or less price insensitive, then it’s not unnatural to think about buying a few yourself). This sort of thing always goes on longer than you expect it to.

    Also worth remembering that a lot of what you are seeing in the dollar price of oil is not oil going up but dollars going down. The euro price of oil has risen by about 15% trough to peak. SO if oil comes down, I don’t see why it necessarily comes all the way back down.

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