Uh-Oh: Economist Cover on Oil

Painful though it is, this oil shock will eventually spur huge change. Beware the hunt for scapegoats

Cover art courtesy of The Economist, May 29th 2008 issue

For those of us who believe in such things as contrary indicators, this suggests a short term top in Oil to me. I would bet we don’t see new highs in Oil for the next 6 months, and perhaps even 12 months.


Thirty-five years on, oil prices have quadrupled again, briefly soaring to a peak of just over $135 a barrel. But, so far, this has been a slow-motion oil shock. If the Arab oil-weapon felt like a hammer-blow, this time stagnant oil output and growing emerging-market demand have squeezed the oil market like a vice. For almost five years a growing world shrugged it off. Only now is it recoiling in pain.

Before engaging in a knee jerk dismissal of the magazine cover indicator, please read page 9, #4 of this report: Contrary Indicators 2000 – 2003 Bear.


UPDATE: June 4, 2008 10:26am

My friend Paul Kedrosky references the Senate debate as the crude oil top tick . . .


The Economist, May 29th 2008

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What's been said:

Discussions found on the web:
  1. Mich(^IXIC1881) commented on Jun 3

    Since I am one of those who don’t quite see the value of magazine cover indicators, I am fine with the bet.

    If we see a price above 135 in the next 12 months, will you lay rest to the magazine indicator stuff on this blog?

  2. haileris commented on Jun 3

    Haha, agreed. Top in crude! If it’s going to be on USA Today or Time Magazine also, that would be like a 100% indicator ;-)

  3. haileris commented on Jun 3

    Mitch: The indicator is because after it hits the masses, there’s no one else left to be buyers, all the buyers are already in and the hype is done for — all there’s left are the buyers to start selling, that’s the value.

  4. larster commented on Jun 3

    So many factors affect the price of oil, unrest in Nigeria, strikes in Norway, hurricanes in the Gulf, Bush attacking Iran, etc. that the magazine cover indicator is of no value in predicting oil prices.

  5. BG commented on Jun 3

    I’m with you. The price of oil is now changing behavior. The use of Mass transmit where I live is up big time. They are adding routes, frequency of routes and more buses. Personally, my vehicles don’t move unless it is absolutely necessary and I do my running around in parallel with others trips in the same area.

    I am betting everyone else is just as pissed as I am and is also conserving every chance they get. Oil has plateaued for the time being. I also suspect we will be stuck with a sluggish economy for months, if not years to come.

  6. David Merkel commented on Jun 3

    The Economist is a better publication than most, so I am neutral on this one (though a subscriber to it for the past 20 years).

    That said, in the fall of 1998, they had the “Awash in Oil” cover, while oil was at $10/barrel, and they forecast that the price would drop to $5/barrel. That was within a week of the low price for crude. Been up ever since.

  7. Mich(^IXIC1881) commented on Jun 3

    I hear what you’re saying but, and it’s huge but, I believe Economics or another magazine would have another cover if oil hits 150, and Barry would then pick that one to prove the value of magazine cover indicator, ignoring all the previous covers with the same theme.

    I am not saying there isn’t a truth in “once everybody is talks about it, it is time to bail out” but who knows how many more oil covers is Economics gonna have if it were to keep going up…Eventually one of them will be close enough to the top of course.

    I am actually happy that BR put this cover, now we have a record of the “cover indicator”, and if oil should go pass 135, I will reference this thread each time BR adds a new topic on this subject.

    Can’t wait.. (disclaimer: no oil positions long or short)

    Oh and it’s Mich (from “Mich”igan not from Mitchell)

  8. Joe Klein’s conscience commented on Jun 3

    I saw someone on CNBC this afternoon said he thinks oil be back below $100/barrel by election day. He also said he believes oil might be back under $80/barrel with in a year.

  9. MarkC commented on Jun 3

    Yeah Mich, but BR did qualify his call as a “short term” top… not actually that hard of a call really, as it’s been an incredible run to date so it’s rather easy to imagine crude trading sideways for the rest of the year… and eventually this so-called recession has to have some dampening effect on demand, right?

  10. P. K. commented on Jun 3

    Here’s some more anecdotal evidence from what some consider hocus-pocus–T.A.

    1) Take a chart of crude, back to Jan. ’07, and draw a few trendlines connecting each low. The lines get increasingly steeper, meaning unsustainable.

    2) Look at the inordinate # of E. & P. stocks that just since this January are up 40 to 100%.

    I am with BR that a 6 month correction is in order.

  11. Bobby_P commented on Jun 3

    The first Cat 3 hurricane that forms in the Gulf of Mexico will be good for at least $10 of upside in this market.

  12. John Borchers commented on Jun 3

    I don’t think there’s quiet enough hype yet to call it a peak. Normally we should see many stories of the same type.

    Gold was more obvious as Bloomberg radio commercials were going all day long about buying spot gold and local shops wanting to buy gold.

    I’m out of all oil and energy trades myself. I’m buying the retail and home retailers. The back half of this year I’ll buy REITs.

    When energy starts to cool down (when the green energy stocks die a tragic death due to lack of actual profit /profit growth). That’s when I’ll buy my local energy stocks.

    People buying green stocks have made a tragic mistake. Things like solar cells or wind turbines are only sold once in many years but the energy company gets to charge for their free energy forever. Who’s going to have the bigger profit margins?

  13. Mich(^IXIC1881) commented on Jun 3

    Well he said 6 to 12 months..we’ll see.

    As per BR’s advice I read the page 9, #4 on the link. All I saw was that if I were to trade on the two mag covers from July 29 ’02, I would have stopped out twice with 8% or 10% losses on my purchase price (closing price as of July 29, 2002).

    Further, section 5 of the same document talks about the “consumer sentiment” well it is awful now, how come that is not a contrary indicator? Well, because most believe consumers will get even more pessimistic, and at that time the markets will improve, sentiment will rise and we will look back and say “what a great time it was to buy”… Well…it is at 28 yr low now, why aren’t you buying with both hands now???

    That is the point I’ve been trying to make, all these indicators are easy to spot in hindsight, but while going through it (e.g. consumer sentiment at 28yr low), you base your investment decisions on more solid analysis, rather than these anecdotal indicators.

    Last thing, when I see “China the new super power” cover on one of these mags, would that mean it is the beginning of the end for China? Well it should be, following this logic.

    In summary, any indicator to trade on, depends on our point of view. Luskin is saying now “when everybody is selling you should be buying”….You know what, I will say the exact same thing when the time for me comes, every one of us will say the same thing,but everybody has their own timing on these indicators…To Luskin, people are selling now and the time is now, to me I don’t think the time is now..

    Same thing with mag indicators, Barry sees that cover and says it is time to get out… if it goes up further, some magazine will put it on the cover again and somebody will say “wow look at the indicator, it is time to get out now”, and one of those will be correct and we will all look back and say “mag indicators work”

  14. dukeb commented on Jun 3

    Anybody here ever actually work inside a magazine? Cover art, headlines, etc., have a single focus. Sales. (And due to deadlines, the it’s usually easiest to simply sensationalize the obvious.) On the whole, the people behind the covers are about as impressive as cold pizza, cheap beer, and a hairy armpit. (They’ve got dogs to walk, dinners to eat, porn to watch too.) As a contrary indicator? Sure, along with a trillion-billion other equally obvious & timely events (water-cooler talk, TV, blogs [my indicator is TBP touting indicators]) that together form the human collective. I think the draw of the cover here is that it seems less anecdotal. But it’s not. It’s just a paper curtain behind which you’ll find the usual human folly.

  15. ottnott commented on Jun 3

    An important factor to keep in mind regarding oil price is that, because the price has risen so far, so fast, and because many consumers are protected from the market price by subsidies or price ceilings, the effective price of oil being felt by consumers is far, far below the current spot price.

    We already have demand destruction occurring. When today’s prices work through the system (both for direct energy products and for products/services with a high energy input), demand destruction will be even greater.

    Unfortunately, I have no clue how demand destruction will balance out against new demand from China, etc.

    My gut feeling, though, is that the global economy can’t really afford 80+ million bbl a day at $130/bbl – the economic uses of $130/bbl oil don’t add up to 80+ million bbl.

  16. Mich(^IXIC1881) commented on Jun 3

    Economist Covers
    Aug 21, 2001:
    2001 Things to do in a recession
    —-: Nope, it wasn’t the end of recession, it lasted till Nov 2001

    June 22, 2002
    An economy singed
    The markets’ mood reflects a poor outlook for America’s economy
    —- Nope, there is still 8 months to THE low point

    skipping to current issues….

    Apr 12th 2008
    The Great American slowdown
    —- It is a great contrary indicator title, but I don’t believe it is the reversal point for the economy or the markets..

    May 31st, 2008
    —- Who knows, if it goes up, they will make another cover

  17. DL commented on Jun 3

    Certainly, we’re overdue for a short term shakeout in oil.

    But with Fed funds at 2%, there’s no way that this is the top for oil.

  18. Bob Markman commented on Jun 3

    If a writer–or his editor–doesn’t know the difference bewteen ‘vice’ and ‘vise’ why should I believe anything else they might say. Sheesh…clowns to the left of me, jokers to the right….

  19. rickrude commented on Jun 3

    Mitch: The indicator is because after it hits the masses, there’s no one else left to be buyers, all the buyers are already in and the hype is done for — all there’s left are the buyers to start selling, that’s the value.

    Posted by: haileris | Jun 3, 2008 7:44:33 PM
    what an idiotic statement ….
    oil contains energy that is converted into
    kinetic energy by internal combustion.
    So your statement is stupid, in the end, theoil is refined, then
    consumed in the production of kinetic energy.

    It is not the USD which can be created at will.

  20. Aiden commented on Jun 3

    I love how CNBC has called the (at least short term) top in oil and the (at least short term) bottom after the collapse of Bear Stearns.

    I am going to be watching for any specials that they have, they are the best counter-trend indicator I have seen.

    First in being last to the party, worldwide.

  21. Marcus Aurelius commented on Jun 3

    Oil might go down, but I think the prices will be sticky (like real estate) and it won’t be because of speculation.

    The prices will be sticky because the world needs to buy oil more than those who possess it need to sell it (think DeBeers, or a farm owned outright). There’s also the fact the a new high has been established, and while the masses kvelled, they didn’t stop buying.

    What will drive any reduction in price will be the lessened demand due to smaller vehicles and less driving.

  22. RW commented on Jun 3

    Hey Barry
    Time to bring back your “current US dollar position versus the Euro” graphic.

    I pasted it into my FX work the last week in April when EUR/USD was 159+

  23. Ed commented on Jun 3

    you buy a house
    You use a house
    You sale a house(make a profit)

    You buy oil/diesel/gasoline
    You use oil/diesel/gasoline
    You sale ??????????? (nothing)

  24. simon commented on Jun 3

    My vote goes to the temporary top in crude. Its a good call. I like Jim Kingslies Energy Investments Stratergy Blog analysis. Oil tops now and goes sideways for 6 – 18 months. But the next time oil goes exponential it will be the real real crunch.

  25. Lord commented on Jun 3

    Is it an indicator only if they predict a continuation and extrapolation of the trend or if they predict a reversal as well?

  26. Fredex commented on Jun 3

    I have found the magazine cover indicater a useful psychological tool since Business Week’s Death of Equities cover.

  27. Ed commented on Jun 4

    Maybe as an indicator it IS all anecdotal.
    But I will say that I knew Housing was finished when in May of 2005 the Wapo ran an feature article about a Playboy Playmate who was giving up on her career as a model and getting into Real Estate.

    I sold in July 2005 and we all know that housing has deflated faster than a Silicone implant with a rusty nail stuck in it…

  28. Andy Tabbo commented on Jun 4

    The Economist is a terrific indicator. They’re usually good for a pop in the US dollar whenever they post a bearish dollar cover. I’m with Barry on this one.

    Also, I was very critical of Barry when he tossed up that Euro screwing the Dollar cartoon back in April…because HIS blog pegged the top of the Euro.

    The passive index buying of ALL commodities has been a primary driver of ALL commodity prices. If Congress gets serious about curtailing this massive inflow of funds, it will be VERY BEARISH oil prices.

    – AT

  29. Francois commented on Jun 4

    “If Congress gets serious about curtailing this massive inflow of funds, it will be VERY BEARISH oil prices.”

    “Congress” and “serious” in the same sentence?
    About curtailing the God-given right of traders to make max profits in our unrivaled “free markets”?

    Talk about a contrary indicator!

    BUY! BUY! BUY!

  30. michange commented on Jun 4

    I was in a dotcom when Economist almost perfectly top-ticked the tech-bubble crash.

    That said, I beleive in the contrarian stuff, but some content analysis should be performed.

    So let us be theoretical.

    Contrarian indicator can only appear in :
    – a somewhat unpredictible market
    – where some speculation may occur
    – under circumstances of an observable megatrend impacting the general opinion
    – for which a given mass-media vulgarises the forementioned trend
    – when the vulgarisation occurs in the form of a prediction

    Does not apply to China as an emerging power, as one cannot speculate on China, in the risk-investement acception of the term ‘speculate’.

    About blogs : the more a blog is popular, the more it has to vulgarise, the more it can become contrarian…

    What should be done is an ananlysis of the distribution of predictive magazine covers in front of the real outcome that followed.

    Some Phd thesis on that very subject *MUST* exist somewhere… anyone heard about such a work?

  31. michange commented on Jun 4

    I just read a damn good article on a blog this month about consulmer seniment indicator never being predictive, and always being aligned in real-time with the markets… it seems that the cover indicator is behaving the same way.

  32. Barry Ritholtz commented on Jun 4


    That’s a fair question. Let me reframe your question thusly:

    How can you tell when sentiment in a traded item has reached so extreme a point that its at or near the top of its run?

    I distinguish between ordinary consumer survey sentiment, and the extra-ordinary editorial decision to put something on a magazine cover.

    Its not precise, its not perfect — but its also worth not ignoring . . .

  33. Bob commented on Jun 4

    The NY Times has an interesting article this morning, Big Vehicles Stagger Under the Weight of $4 Gas. In it, two paragraphs that caught my attention:

    Americans fell in love with vehicles like the Ford pickup trucks in the 1990s, back when gas didn’t cost much more than $1 a gallon. That seemed normal at the time, because gas prices had remained in a narrow range — roughly 90 cents to $1.25 a gallon — going back to the early 1980s.

    But this stability was actually a sign of something deeply unusual. The cost of most everything else was rising, as was the size of people’s nominal paychecks. So in practical terms, gas was becoming cheaper. By 1999, it had effectively fallen to its lowest point on record, about 30 percent lower than in the 1950s and ’60s.

    (emphasis mine)

  34. Dogwood commented on Jun 4

    I think GM’s move this week to close four truck and SUV plants and launch the Volt was the top call for oil. The Economist cover just seals the deal for me!

  35. Turbo commented on Jun 4

    I still remember that Economist cover in 1998…I’d just loaded up on Canadian oil companies that were looking very cheap at the time, and it made the pit of my stomach drop out. This week’s cover makes me feel a lot better about unloading my last Canadian oil position last week. The US majors are still priced for $80-100 oil, so there may still be some value there, but commodities definitely have that bubbly feel.

  36. William Elder commented on Jun 4

    Are the Economist cover/Senate hearings really contrary indicators? Or just signals that demand is finally slacking in the face of increased prices? Or am I arguing semantics?

  37. dblwyo commented on Jun 4

    The oil situation is changing radically for many complex reasons. Nonetheless I suspect BR has a point in the short-run on oil per se; and almost as important the stocks of the energy companies. Jubak has a great recent column (last week ?) on the topic. In the long-run Supply < Demand due to growth. In the intermediate to long-run there's plenty of oil but it's trapped behind political barriers. The reserves and production capacity in front of the barriers and accessible are grossly under-invested, e.g. Mexico, Russia, Gawar, Alaska, North Sea and/or declining. In the very short run I suspect there's a base price of ~$80/barrel plus 10-20% premiums for geopolitical risks and speculation. But we'll stay on the crisp edge of disaster until we change the underlying structure of energy usage which is a 2-3 decade effort. My best efforts at summarizing all this and collecting the readings are here: http://tinyurl.com/5wxuo9 and http://tinyurl.com/5jcah5 .FWIW.

  38. Mark commented on Jun 4

    I dunno,

    What this has shown me is that there is quite a bit of inelasticity in the demand/price relationship of oil as the production and demand curves meet.

    Market forces may reduce demand to peak production rates (87MMbpd), but the price that is the logical floor will always be bumped by external events (commodities speculation, regional conflicts, political situations in producing nations, hurricanes, key wells decreasing output, etc).

    A key energy commodity thats transitioning into in a negative net supply surplus is bound to be subject to a lot of price volatility on a go forward basis. It may drop, but I think a true ‘floor’ will be toughter to discern in the future.

    People may jump in and out as speculators get haircuts, but I think this is a price level that will be around for quite some time to come.

  39. Barbara commented on Jun 4

    The magazine cover indicator has worked well for years. Two of my favorite include New Yorker’s May 1, 2000 “Money” cover which includes an article on day trading by David Denby and the New York Times June 11th, 2006 cover “Debt”. While the latter may have been a little early for the shorts, it just about marks the top in residential sub-prime mortgage underwriting.

  40. Sajal commented on Jun 4

    Everyone I know is trying to pick the top in crude and going long DUG etc. While this could be a nice 10-15% decline, I do think people who are looking to get in on the crude action (pun intended) would likely get whipsawed by a race to the top. I won’t be surprised if we see a crude rally before the Chinese Olympics.
    THAT would be the top before a 30-40% decline.

  41. yo commented on Jun 6

    How much did you bet that we would not get to new highs?

  42. D-rock commented on Jun 7

    I sure hope you didn’t put your money where your mouth is.

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