Fundamentally Flawed
Posted by Phil Flynn I PFG Best Research • Wednesday, July 28. 2010 • Category: Rohstoffe
The Energy Report Wednesday, July 28, 2010
Another failed upside breakout as the global oil market continues to wallow in this endless trading range. As the bull and bear frustrations continue to mount, I have heard traders on both sides of the market that tell me that somehow the markets are wrong and that the fundamentals do not justify the current price. In other words that the market is somehow fundamentally flawed and that the price is out of whack with either your bullish or perhaps bearish reality. Oil bulls are frustrated with the lack of investment that they see in the oil industry and feel we are over estimating the drop in demand. They point to China and its explosive growth and its growing appetite for oil. They say that the market is not correctly accessing event risk especially with the type of talk coming out of Iran and Israel in recent days especially in the aftermath of European sanctions.
The oil bulls say that despite the drop in demand that as the economy continues to recover oil supplies will tighten faster than you think. The latest to express that frustration was noted oil bulls Goldman Sachs who just recently exclaimed that crude oil prices are “significantly” below the level warranted by fundamentals. Goldman Sachs Group analyst David Greely complained that the balance between supply and demand in oil will continue to tighten in the second half of this year as global economic growth may boost demand, returning inventories to “more normal” levels toward the end of the year.
Of course that came as Goldman had to reduce its near-term price forecast to the lower end of its targeted $85-$95 because of what they say is “still-fragile” sentiment in the marketplace. Oil Bears will counter that oil is artificially high as evidenced by the global glut of oil that permeates the market place. Not to mention a global glut of spare production capacity and a global glut of spare refining capacity as well. Take recent data from the International Energy Agency that supports this bearish view.
The IEA reported that oil stocks in OECD countries increased again in May across all regions and by a combined 35.0 million barrels hitting 2 757 million barrels or a whopping 61.0 days of forward demand cover. The IEA say s that it expects to see further increases in supplies in their next report. Yet on the demand side their growth expectations are very modest. The IEA say that global oil demand is only expected to increase by a very small 1.6% next year or a paltry 1.3 Million barrels. This is a far cry from the type of demand that would seem to support higher prices going forward.
So who is right? Is the price of oil fundamentally underpriced or overpriced. Well the truth is that the question is fundamentally flawed. The price of oil is always fundamentally correct assuming that you are focused on the correct fundamental. Oil and its price may not reflect as clearly the supply and demand fundamentals of the past because the price has been influenced or some might say manipulated by global central banks as they struggle to react to this global economic crisis. The price of oil is being influence not just by what is happening now but by what may happen in the future. If the economy gets better then the market feels that this will be inflationary according to oil bulls. Bears warn that if the economy gets too good stimulus will have to be removed thereby breaking the price of oil. In fact it is this type of debate and trading that keeps oil range bound.
The truth is that the market is pricing in both sides of this outlook and doing it well and that is why we are going nowhere. When the fundamentals seem to be wrong it is probably because you are not doing your homework. Or because the market itself is trying to hear both sides and adjudicate the eventually outcome...And now the fundamentals are being driven by both bearish and bearish forces and that is the reason we are seeing one of the biggest sideways markets in decades. I am on record as saying that that I belive that eventually we will break out lower but in the meantime do not fight the fundamentals. Trade the ranges.
And a great way to do that is to get my daily buy and sell points on all the major commodities markets while you still can. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com And as always make sure you are tuning into the Fox Business Network!
Phil Flynn
Senior Market Analyst
800-935-6487
312-563-8344
pflynn@pfgbest.com
Phil Flynn is Energy Analyst and General Market Analyst with PFGBEST (www.pfgbest.com). Phil is one of the world’s leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil’s market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, traders and global media.
Because he has been available to media around the clock, even during some of the most turbulent market periods in history, and because he has built a solid reputation for accuracy in his market analysis and forecasts, through thousands of interviews and broadcast appearances for more than a decade, Phil Flynn has become a headline-making name even as he continues to provide expert advice and customer care to his proprietary trading account clients.
Media highlights include: CNN, CNBC, Bloomberg, ABC, CBS with Katie Couric, NBC’s “Today Show” and “Nightly News with Tom Brokaw”, FOX’s “O’Reilly Factor”, PBS’s “The Newshour with Jim Lehrer” and “Nightly Business Report”, MSNBC’s “The News with Brian Williams”, Wall Street Journal Report, The Wall Street Journal, Business Week, Investor’s Business Daily, The New York Times, The Los Angeles Times, Chicago Tribune, Associated Press, The Toronto Globe & Mail, Houston Chronicle, Futures Magazine, National Public Radio’s Marketplace, a chat with the President of the United States, and many more venues.
You can read Phil’s daily market analysis and blogs at www.pfgbest.com.
PFGBEST is among the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries. The company is a leader in sustainable investing through diversified products including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market research, and direct online futures trading through its BESTDirect™ platform, and numerous other platforms and applications.
Phil’s commitment to and experience in futures trading is documented in two books, The Mind of a Trader (Financial Times/Pitman,1997), and Trading Online (publisher, date), both by Alpesh B. Patel. Phil is a lifelong resident of Illinois. He attended DaleyCollege in Chicago before beginning his career on the trading floor of the Chicago Mercantile Exchange.
Disclaimer
There is a substantial risk of loss in trading futures and options.Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
Another failed upside breakout as the global oil market continues to wallow in this endless trading range. As the bull and bear frustrations continue to mount, I have heard traders on both sides of the market that tell me that somehow the markets are wrong and that the fundamentals do not justify the current price. In other words that the market is somehow fundamentally flawed and that the price is out of whack with either your bullish or perhaps bearish reality. Oil bulls are frustrated with the lack of investment that they see in the oil industry and feel we are over estimating the drop in demand. They point to China and its explosive growth and its growing appetite for oil. They say that the market is not correctly accessing event risk especially with the type of talk coming out of Iran and Israel in recent days especially in the aftermath of European sanctions.
The oil bulls say that despite the drop in demand that as the economy continues to recover oil supplies will tighten faster than you think. The latest to express that frustration was noted oil bulls Goldman Sachs who just recently exclaimed that crude oil prices are “significantly” below the level warranted by fundamentals. Goldman Sachs Group analyst David Greely complained that the balance between supply and demand in oil will continue to tighten in the second half of this year as global economic growth may boost demand, returning inventories to “more normal” levels toward the end of the year.
Of course that came as Goldman had to reduce its near-term price forecast to the lower end of its targeted $85-$95 because of what they say is “still-fragile” sentiment in the marketplace. Oil Bears will counter that oil is artificially high as evidenced by the global glut of oil that permeates the market place. Not to mention a global glut of spare production capacity and a global glut of spare refining capacity as well. Take recent data from the International Energy Agency that supports this bearish view.
The IEA reported that oil stocks in OECD countries increased again in May across all regions and by a combined 35.0 million barrels hitting 2 757 million barrels or a whopping 61.0 days of forward demand cover. The IEA say s that it expects to see further increases in supplies in their next report. Yet on the demand side their growth expectations are very modest. The IEA say that global oil demand is only expected to increase by a very small 1.6% next year or a paltry 1.3 Million barrels. This is a far cry from the type of demand that would seem to support higher prices going forward.
So who is right? Is the price of oil fundamentally underpriced or overpriced. Well the truth is that the question is fundamentally flawed. The price of oil is always fundamentally correct assuming that you are focused on the correct fundamental. Oil and its price may not reflect as clearly the supply and demand fundamentals of the past because the price has been influenced or some might say manipulated by global central banks as they struggle to react to this global economic crisis. The price of oil is being influence not just by what is happening now but by what may happen in the future. If the economy gets better then the market feels that this will be inflationary according to oil bulls. Bears warn that if the economy gets too good stimulus will have to be removed thereby breaking the price of oil. In fact it is this type of debate and trading that keeps oil range bound.
The truth is that the market is pricing in both sides of this outlook and doing it well and that is why we are going nowhere. When the fundamentals seem to be wrong it is probably because you are not doing your homework. Or because the market itself is trying to hear both sides and adjudicate the eventually outcome...And now the fundamentals are being driven by both bearish and bearish forces and that is the reason we are seeing one of the biggest sideways markets in decades. I am on record as saying that that I belive that eventually we will break out lower but in the meantime do not fight the fundamentals. Trade the ranges.
And a great way to do that is to get my daily buy and sell points on all the major commodities markets while you still can. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com And as always make sure you are tuning into the Fox Business Network!
Phil Flynn
Senior Market Analyst
800-935-6487
312-563-8344
pflynn@pfgbest.com
Phil Flynn is Energy Analyst and General Market Analyst with PFGBEST (www.pfgbest.com). Phil is one of the world’s leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil’s market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, traders and global media.
Because he has been available to media around the clock, even during some of the most turbulent market periods in history, and because he has built a solid reputation for accuracy in his market analysis and forecasts, through thousands of interviews and broadcast appearances for more than a decade, Phil Flynn has become a headline-making name even as he continues to provide expert advice and customer care to his proprietary trading account clients.
Media highlights include: CNN, CNBC, Bloomberg, ABC, CBS with Katie Couric, NBC’s “Today Show” and “Nightly News with Tom Brokaw”, FOX’s “O’Reilly Factor”, PBS’s “The Newshour with Jim Lehrer” and “Nightly Business Report”, MSNBC’s “The News with Brian Williams”, Wall Street Journal Report, The Wall Street Journal, Business Week, Investor’s Business Daily, The New York Times, The Los Angeles Times, Chicago Tribune, Associated Press, The Toronto Globe & Mail, Houston Chronicle, Futures Magazine, National Public Radio’s Marketplace, a chat with the President of the United States, and many more venues.
You can read Phil’s daily market analysis and blogs at www.pfgbest.com.
PFGBEST is among the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries. The company is a leader in sustainable investing through diversified products including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market research, and direct online futures trading through its BESTDirect™ platform, and numerous other platforms and applications.
Phil’s commitment to and experience in futures trading is documented in two books, The Mind of a Trader (Financial Times/Pitman,1997), and Trading Online (publisher, date), both by Alpesh B. Patel. Phil is a lifelong resident of Illinois. He attended DaleyCollege in Chicago before beginning his career on the trading floor of the Chicago Mercantile Exchange.
Disclaimer
There is a substantial risk of loss in trading futures and options.Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
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