The Stupid Phase of Oil

When I guesthosted Squawk last month, I told Mark Haines that we were about to enter the "STUPID" PHASE of Oil. He raised an eyebrow on that one.

Yesterday’s Goldman Sach’s call for $105 Crude –and the markets reaction to it — was a perfect example of what I was referring to.

At $40, we heard every rational for why Oil was overpriced — but at $55, suddenly everyone discovers religon. Now, Oil is — apparently — going to a gazillion.

Here’s an excerpt from our prior discussion about the "Stupid Phase:"

"We find it ironic that oil doubters — the ones who were so harshly negative
when Crude was between $40 and $45 — have suddenly found religon. We recall hearing about the $20 "terror premium," the
$15 bumb that speculators were causing. We were even warned that the Chinese economy was
slowing (that implied lower oil, also).

Indeed, we had heard every "excuse" for the price of oil –
except for the one that mattered: A
gradually improving global economy, one that was concentrated in Asia but particularly in
China and India. We would be remiss if we failed to note that over half of the
vehicles in our neighborhood are gas-guzzling SUVs . . . 

As oil passed $50 on the way to $55, something intriguing
occurred: The Oil Bears became rip roaring Bulls. We now enter what we
academically refer to as “the stupid phase,” with calls for $100 crude and
unsustainable gains in the energy sector.

Consider Jim Altucher‘s view:

"Goldman only changed its range from $50-$85 to $50-$105. The fact that the price of oil moved so quickly on a change in range from some analyst at Goldman tells me this move has nothing to do with the reality of oil’s supply and demand and everything to do with short-term traders jumping in and playing the game." 

As we’ve observed previously: Its rarely the news, but rather, the reaction to that news which is so telling.

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What's been said:

Discussions found on the web:
  1. bernard1 commented on Apr 3

    was volatility falling when GS issued their report? Falling vols are never good for market pros.

  2. John Kuran commented on Apr 3

    “We would be remiss if we failed to note that over half of the vehicles in our neighborhood are gas-guzzling SUVs…”

    Hey Barry, aren’t you driving a Maxda RX 8? Isn’t that a gas guzzling, oil burning rotary? 18 mpg in the city and 23 on the highway according to the EPA (but I’ve read that it’s more like 13 mpg in the city and 20 mpg on the highway.). And burns 1 quart of oil every 3,000 miles?

    Pot calling kettle?

  3. Adz P commented on Apr 3

    Dear Mr Ritholtz
    What an interesting site you have. Congratulations etc.
    I’m the journalist from who got the full `superspike` report last week…hence…
    What i was interested in was GS’s idea that oil companies and producers would continue to create a `supply cushion` as GS call it, (extra spare capacity above demand requirements) even in the face of falling prices (ie after GS’s `superspike`). Which i would say would be fairly unprecedented. Would companies continue expanding output and paying for investment in the face of a falling commodity price. What do you think about that? I would be interested to note your comments.

    You may also like to see that last year I did a couple of articles that basically attacked the idea of a `terror premium`. It and `speculation` are nonsense imo. At the time the most concentrated set of (pipeline) attacks occured in Iraq the price of oil fell – at the time of the US presidential election.
    Oil Market Myths Shattered: Is The ‘Terror Premium’ Nonsense?

    Thank you for a most stimulating read. I shall look out for you on cnbc and i will follow your postings.

    Yours sincerely,

  4. ed commented on Apr 3

    Sorry but Jim Altucher’s cause and effect (GS report = oil price increase) doesn’t fly. The talking heads always come up with whatever convenient daily explanation works for essentially random day to day moves in the markets.

    Short term traders are jumping in and out every day.

    Its a reach to think that an analyst report can meaningfully influence price movements in the worldwide oil market.

  5. mh497 commented on Apr 4

    Prices are flying because not too many people are eager to take the other side of the equation anymore, and the oil market seems like it’s playing chicken to see if oil producers or oil consumers cry uncle first (and who skids off the road and crashes..). Some people might call this price discovery.

    As you’ve said yourself, gas at $2.20 is cheap, sometime in the next 5 years we may learn just how cheap it is.

    Goldman’s call just laid out the reality, I think, that though they think $50 in 2005 and $55 in 2006, there is a possibility that things get out of hand supply or demand wise (unfortunately likely both) and we need to spike to $105 to put some sense back into everything.

  6. fatbear commented on Apr 4

    One factor not noted so far – when oil hit its highs last year, the 2009 contract stayed around $40 – this time, it’s over $50 – everything out to 2011 is $50 or over (or within cents of there) – it may be irrational exuberance, but the run up is wider this time

  7. M1EK commented on Apr 4


    The RX-8 is far superior to the typical SUV on any scale you care to use.

    1. Better mileage – typical Expedition figure is 14 mpg.
    2. Emissions – SUVs are allowed to, and most do, emit far more pollution than a passenger car.
    3. CAFE – his RX8 has a hefty price premium because its (somewhat poor mileage) gets averaged in with the rest of Mazda’s CAR fleet which must average 27ish. The SUVs his neighbors have get treated far more gingerly – averaged with all TRUCKS to meet a far lower 20ish figure.
    4. Tax breaks – even if Barry uses the RX-8 purely for business, he doesn’t get the sweetheart depreciation deal that people get on the heaviest SUVs.
    5. Safety – his RX-8 doesn’t use other peoples’ cars as his crumple zone, and probably protects HIM better than an SUV would too.

  8. John Galt commented on Apr 6


    Your comment about Oil futures on the NYMEX remaining above $40 was a telling one. NYMEX NG futures have also stayed above $5.50 all the 2way out to Dec 2010…even though LNG becomes viable (including building of tankers/ports) at $4.50. Unless they are betting on a further 20% drop in the USD (as the LNG would come from other countries, though Trinidad, a major source of NG, has its currency pegged to the USD)

    You heard it here first. $25.00 oil (real dollars, not nominal) by 2010.

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