It can’t be a surprise that within 48 hours of the mass of experts calling for $10 and $20 oil we have seen the price rally a tad bit over 10% to above $31 a barrel.

I almost chuckle when I think of these numbers – and then actually have to type them.

It is important for you to make a mental note on this: The ‘experts” calling for the $10 and $20 prices came online only after crude fell from $120 or so and finally broke through $30 on Tuesday.

Your notes earlier in the week suggested that while we could see something closer to $20 before all is said and done – as one last gasp of short selling and mass panic – odds are high we are seeing the fits and starts associated with the ends of trends.

Yes, that “ending process” can cover a $10 price range but the key point is the word “ending”.

Couple of Thoughts on Oil

I recognize some of this has been covered as nausea in the press already but stick with me here for a sec:

The thrashing of comments and banging of heads against office walls across the globe fearing cheap oil has truly been an exercise in comedy for anyone old enough to remember the opposite fears and tantrums from 2008.

There will be a time when prices bounce back – say to the 60’s, maybe even 70’s or 80’s if we really get the upside speculation going. But here are a few things to keep in mind:

a) As we speak, technology experts are sitting with drilling teams building tools which will find oil profitably at much lower prices.

 

b) In the not to distant future, that “profitable” price could easily have a 3 in front of it.

 

c) Smart drillers have completed over 4,800 wells at last count – and capped them – awaiting higher prices.

 

d) Meaning that as soon as we see the supply burn off a little – and price bounce accordingly – we can expect to see a new flood of supply to meet those prices.

 

e) All the while, wind power, hydrogen, nat gas solutions, solar and electrical channels are all slowly converging. Their technologies are also getting cheaper by the week.

When these waves of fears are finally quelled as this tectonic shift in oil is better understood in the long run, oddly the world will be a better place. We may find we starve the terrorists as we sap up their revenue values and support. Heck of a lot cheaper than million dollar computer guided weapons targeting $1000 pickups in the desert I suppose.

Further, when the massive fears have subsided, consumers around the world will begin to settle in on the idea that for a long time ahead, more cash flow will be present in their monthly budgets.

Lastly, there will be a recognition that while extremely painful for those in the oil producing (and related) business, this tectonic shift has been beneficial for more than it has hurt.

Oh – and one more thing:

When oil does bounce, when you hear “oil crested $50 today as the rebound in prices continued…blah, blah, blah…”, be absolutely certain there will be a batch of new experts brought in to tell you “yes Maria, but you know rising oil prices are going to pinch the consumers’ spending ability and retail sales will be hurt…”, or my favorite…”yes Bob, but most of this rally is because of the recent dollar weakness and that cannot be good for inflation concerns…..”

And the really, really funny part about that is that the crowd will be afraid of those reasons for coming doom too.

Be Aware

As covered in several of your more recent notes, the thing about fear is that it can become part of your everyday thinking. It can block your perspective on what is ahead. In doing do, it can change your habits. If too many change their habits – the self-fulfilling nature of economics can become rooted.

If we keep our wits about us – as a large group – we can indeed whistle past the recession graveyard again.

Besides, we have never had such a well forecasted bear market and recession all in one nice package.

Lapping The Bad News

Given the ugly start – I suspect the market’s climb back up the mountain will be a bit tepid. I would take this as a good thing. One does not want the damage to be erased quickly.

The longer this market can remain volatile and choppy, the deeper the fear will rest. Hence, the longer the values will be available and the longer it will take for the masses to return – and they always return – at higher prices – when it feels safe again.

After all – things only feel safe again when they are more expensive right?

This earnings seasons marking Q1 and Q2 this year will encompass most of the lapping of the bad news from last year. This means that after that, the YOY comparisons will be against ugly numbers from the previous 12 months – and appear to the crack analysts on Wall Street as “improving numbers.”

Yes – nutty – but it is the game of numbers that we all play here.

Perception is the key – along with (always) patience and discipline.

I close with a reminder:

  1. Have a great weekend.
  2. This window of panic is no different from the others.
  3. It is ugly, painful to watch in the short-term and valuable in the long-run.