Wednesday, February 11, 2009

Oil is crashing to 30? Or to 20?

The message to all oil bugs out there: oil broke $40 support and confirmed it today. It's not a rollover effect of U.S. OIL FUND ETF (USO) described in this article, rollover happened on February 6. According to that article, USO now holds more than 20% of future oil contracts. Which accidentally means that it holds share of future oil contracts exceeding size of the physical market for Texas tea. So, rollovers are over, and price is going down. What's next?

I wrote here that I don't see any reasons for oil bottom now. I also provided chart of USO with very interesting downward triangle formation. Now this formation is broken down and break is confirmed. That's a very bearish signal. Granted, USO doesn't represent oil exactly, because effects of contango and rollover are killing this ETF right now. But together with fundamental data this signal is important anyway.

I think oil might go straight to $30 from here. And if it breaks that level, it can go even lower.

Please spare me lectures on how oil just can't be lower than $50 because it's a marginal cost of the production. Many marginal producers sold their current production last year at prices between $100 and $140. They don't care about current price, they sold that oil already. Real marginal oil is coming from Middle East, and real production costs on many fields there are still below $10.

How long can this low price last? I don't know. Unfortunately, not all oil producers are forthcoming about their hedging levels. One thing is for certain though: future market is a market of future contracts, not a market of real commodity. If investors start leaving USO and similar ETFs in droves, they can drive price down much, much more.

As usual, I retain the right to be wrong. But I wasn't wrong on oil since last May.

Full disclosure: at the time of publication author did not have any positions in USO. Positions can change any time.

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