COLUMN: Shell-shocked bulls speechless as oil tumbles: Campbell

Fri Jun 1, 2012 9:57pm IST

A fuel indicator displays an empty tank in Bochum April 5, 2012. REUTERS/Wolfgang Rattay/Files

A fuel indicator displays an empty tank in Bochum April 5, 2012.

Credit: Reuters/Wolfgang Rattay/Files

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(The writer is a Reuters market analyst. The views expressed are his own)

By Robert Campbell

CARACAS (Reuters) - If oil was a good bet at $110 a barrel, why are crude's cheerleaders not calling on investors to load up on Brent now that it is in the bargain bin?

Of course, the current macroeconomic situation doesn't look nearly so supportive for crude as before. But it is not as if the current mess in Europe and the slowing pace of Chinese growth should be coming as a surprise.

Europe's shambolic approach to the continent's debt crisis has been going on for years. And for much of that time a chorus of economists has insisted that a breakup of the eurozone is a distinct possibility.

China might be able to build entire cities seemingly overnight, but it is still the world's workshop. No customers, no orders.

Chinese oil demand, at the margin, is highly leveraged to supercharged growth.

Now that China's economy has downshifted, factories that are merely humming along probably won't feel compelled to run diesel generators flat out when power shortages hit in the summer.

Ditto for a few other sophisms regularly trotted out by bulls as they argue for ever-higher prices.

The famous $100 floor on oil prices? Time and again we are told that the countries of the Middle East cannot live without oil at this level, nor can non-OPEC producers stay in business.

That's probably true in the case of an extended run below $100 but no one is making any snap decisions at this point. Independent producers don't want to pull in their horns only to miss the boat in the event of a short term correction.

Saudi Arabia, too, has said it wants prices nearer to $100 than $120 a barrel. As we've only just got there why would they act right away?

Besides, Riyadh doesn't only view oil in terms of dollars and cents. The kingdom uses its petroleum wealth strategically. Chipping away at rival Iran's revenue stream fits into Saudi Arabia's long-term diplomatic goals.

What about the "extremely tight" inventories nonsense that was touted some months ago? Hard to say that now with U.S. crude stocks brimming and overall demand still very weak, meaning that in terms of days of cover stocks are very comfortable.

Or how about tight OPEC spare capacity? This one is hard to dispute but clearly but no one cares about spare capacity issues when inventories are growing.

What about "very strong" emerging market demand.

How this can be asserted with such a degree of certainty is a bit of a mystery to me.

At best analysts are taking old data, of sometimes questionable accuracy, and projecting it forward into the future. This is a risky approach as it assumes the conditions that prevailed months ago are still in place.

Or how about the hoary tale of Brent timespreads somehow telling us that demand remains strong. There are credible alternative explanations that are ignored.

For instance, the increasingly narrow physical basis of Brent means the availability of crude that is actually linked to the contract is narrow, but to extrapolate from that fact may well be problematic.

Even the long-running Iran saga seems to be failing to get oil to do anything. For all the talk of "let's see what happens in July" when the European ban on Iranian oil imports kicks in, the market seems to be quite comfortable in pricing in a minimal risk to oil prices.

A LONG-TERM BUY

The funny thing is that this correction probably does represent a buying opportunity, at least in the long term, for those who accept the current dominant investment thesis for oil.

Anyone who believes oil remains a scarce commodity plagued by inelastic supply and relatively inelastic demand ought to see the current turmoil as a golden opportunity.

The selloff has savaged long-term prices as well as those at the front of the curve. But while the front of the curve is subject to the day-to-day travails of the economy, the longer-dated contracts ought to, at least in theory, reflect the prospects for crude in the future.

Of course, it is a well known fact that long-dated futures prices are a terrible indicator of where the price of a commodity will be in the future.

Instead, they serve more as an indicator of where investors today see prices in the future. But if so, today's investor ought to be buying if he or she believes that the current selloff is really just a flushing out of bad economic news and speculative froth.

But if that is the case, why are the oil bulls so quiet? All too often investors in commodities are steered into short-term instruments on the basis of long-term arguments.

Yet when the going gets tough those long-term arguments get put back on the shelf in return for warnings that the current macroeconomic environment will make for a tough slog for the foreseeable future.

Of course, the problem here is that longer-term investments in commodities are challenging. Liquidity is thin, flat price bets are exposed to all sorts of risks and reflect more a contemporary opinion than a true vision of the future.

And worst of all they take ages to show real profits.

Indeed, if you really were a long-term bull on oil, perhaps buying a basket of oil companies would be the best thing to do.

However commodities desks have little interest in those sorts of trades.

(Editing by Alden Bentley)

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