(Yeah I know you think I took that pic from GreenWriter, but I found it and had this post saved as a draft beforehand).

I bet some of you think I’m talking about oil running out and going to $1000. Nope, I’m talking about the death of high prices. Oil bubble is going bust! I have received double confirmation. Last week someone was talking about buying oil stocks, and how “smart” it was, and how if gas goes higher, your investment does, and how oil will never go lower, how we’re going to run out, etc, etc. He didn’t even mention that IF it were to go lower, he’d at least pay less in gas, although with increased oil taxes, that may not be true. He wasn’t even considering that lower oil was a possibility.

Then I talked to my mom for the first time in awhile over the weekend and she randomly brought up how one of her neighbor’s daughters has owned Exxon [[xom]] inheriting it from her grand parants and was up like 1000% since she was born and up to 200k and how she wasn’t going to sell any of it until she needs to because gas is going to $7 and it’s never going down… And that’s like the only stock she owns… But now everyone’s saying how oil is going up forever, and no one believes it’s going down. And more confirmation… it’s on the radio on a SPORTS show, it’s on the TV, comedians are talking about it, and drumroll… politicians are talking about it! I haven’t been in a taxi, or at a barber in awhile, so maybe someone can tell a story about how their barber was talking about buying oil stocks, but I’m hearing “buy oil” from many non investors. Read some article someone had pointed out (in the comment section I think) about how someone from Royal Dutch Shell says there’s no shortage, there’s no idle tankers, I’ve heard about the Bakken and how the problem is not that there’s shortages, but that they’re drillling more than they can ship, and there’s only one pipeline.

One main reason you have oil going higher, is fear that production will peak… speculations, fear in the market place, pyschology… people willing to pay outragous prices for gasoline, allowing room for the high prices, and people thinking the price of oil will only go up adds to the mentality of “oh I better buy now before prices raise” but the peak has not happened yet and production continues to increase. Global demand cannot increase forever. In the US, demand is decreasing. Refineries can’t support $140 oil and they might not be able to support $135. The fact that politicians are starting to talk about oil is enough to make me want to sell. And they have such great solutions, like taxing the gas companies, and driving many companies overseas.

But you’re still wondering about the timing of it? Look at the energy stocks sell off as oil goes higher. I believe there’s a reason for that. Partly due to concerns that the demand for oil isn’t high enough to maintain enough sales to support the price increase, and partially because there’s an expectation of a sharp decline in oil prices shortly. I think the market has priced in this high demand for oil, the refineries, and gas companies anticipated high demand for the memorial holiday. Now what? People are driving less this holiday, and there’s not as much demand as anticipated, so now gas stations and refineries are overstocked relative to their expectations, and now everyone will be saying, oh shit we have to sell this now while prices are still high. Not only do I bleieve short term we’re in store for a correction in oil, I believe that for the next year we are in for a correction, and an entire shift in mentality. People are going to say “we never want to pay that much again”, people are going to buy more fuel effecient cars, move out of their foreclosed home and start living right next to where they work, and the oil companies won’t want to “hold on” and they’ll be concerned about being able to sell it while the prices are still relatively high. I think we are in for an entire paradigm shift regarding energy.

Aside from that, newsletters have been hyping up the Bakken and the Alberta Sands and Brazilian discoveries, and all of the oil plays, and they’re competing at high prices for advertisment. The fact is, people are looking for oil plays all over, and the “hot oil stock tip” is almost selling like “the hot internet stock tip” used to. I swear I’ve received more newsletters regarding oil prices in the last week than I have in the 3 months before that. Many of it not even related to the stock market. Heck, I’m even getting spam with messages like “oil prices high? earn a full income online and forget driving to work!” and “oil prices have you stressed out? try XXX drug!” Hell, If it gets any worse I’ll get one that says “oil prices got you down? Get up with viagra!” or “Fucked by oil? increase you penis size and your girl will want you to do the fucking!” or some shit like that. Lol, I’m telling you shit like this just doesn’t happen unless you’re at a peak (no pun intended).

Not only that, but the “estimated peak” of production has been delayed due to new discoveries. Supply is growing faster. You have the Bakken oil reserves larger than anticipated([[eog]], [[clr]], [[bexp]], [[nog]], [[mro]], etc. You have the largest find offshore of Brazil [[PBR]] in what’s been said to be over 30 years, and other global discoveries are going to help a lot on the supply side. Then you also have a lot of oil in Canada, specifically the Alberta Sands. There are literally billions of extractable barrels of oil (some say hundres of billions) in these places waiting to be tapped that we now have access to, and the drilling permits have gone way up.

Meanwhile, the inflation and rate cuts are ending, or at least it seems that way. Oil has been booming, not only compared to dollars, but compared to gold and silver. Gold and silver look like they’re trying to catch up now.

In case you don’t get it, the fed staying neutral and maybe even hiking in the near future means that ags and materials will decline in dollars, as dollars are not going to be thrown out of the helicopter as fast as they have been. Strengthing dollar, or at least a more stable dollar means oil won’t continue to rise at the same price, in terms of dollars.

Oil is a politically sensative issue, and now with the stimulous checks out, people are more than likely going to be very concerned about the price of oil. That means actions will be taken. More than likely they’re going to continue to hand out more permits for drilling, and look for ways to decrease the demand and dependancy on oil, they’ll continue to raise axes on oil, which makes things more difficult for oil companies in the U.S. and gives them more incentive to sell it cheaper over seas. But regardless, demand will decrease slightly.

Also, starting this year, tens of millions of baby boomers will be at retirement age of 65. Those that retire no longer need to drive to work everyday. Old People’s greatest fear is running out of money during retirement. Do you think they’re going to be the ones to spend like crazy? The only one spending like crazy will be the government handing checks to these people every month. At least that money gets out of the governments cache of money so it can be spent and help grow the economy, but unfortunately, it’s most likely going to go to people that will become frugal hermits, whether in their current home, or their retirement home, and that means less gas consumption, especially when they’re not driving to work everyday. And millions of baby boomers are going to be retiring every year for quite awhile.

With housing crisis, and a large amount of people losing their homes and/or moving, my guess is there is a greater need for people to move closer to work. Some people that got forclosed on might just move right next to work, so they can walk if they have to, and when houses sell, they will be bought near work. People aren’t always that practical, but at least some of them will most likely get a job closer to home and/or a home closer to job by a few miles. Not a very major contribution, but it still might play a role.

Also something that’s interesting is the 20/10 (sometimes called 20/10/5) rule about stocks being in favor for 20 years, and then commodities/materials/oil/gold/etc for 10 years as stocks go out of favor. The rule of thumb seems to indicate that gold has fallen out of favor, and that other materials, ags, and oil will follow. (on a side note, I have read that gold is underpriced due to the faulty gold lending practices that distort the supply side making it appear more abundant resource… They can’t keep that up forever) so the play would be to remain long gold as a hedge) In the 20/10 rule 1998-2000 is the range for the top of stocks, and the market has been in decline in comparrison to gold ever since. That means 2008-2010 should mark the topping of gold, oil, and commodities, and the bottoming of stocks. I argue that it’s already begun. Notice the decline and recent decending triangle in [[DBA]], the peak in gold and silver when gold was around $1000? This is all an epic 10 year rotation unfolding. This isn’t a rule of thumb to bet your future on, but when comparing it with the rest, it paints a good picture, reminding you that things change, and is another “sign” that can paint a better picture of what’s happening.

The way I see it is this. You can either hold onto your oil stocks, and add a hedge, or you can begin selling your stuff now. I will be doing a little of both, I’ve said it’s okay for a quick trade to buy stocks like [[APA]], [[eog]], [[cam]], [[PBR]], [[dvn]]… but I don’t think oil has much left in it. Memorial day should be the “final hurrah” in oil I believe, any rally we see in “black gold” should be brief.

Greenwriter seems to think $20 of oil or more is because of speculators, I certaintly don’t doubt it. What I wonder though, is what happens when speculators not only panic and get out, but when others begin to speculate on a continued decline. And what happens when the drillers all of a sudden have more incentive to rush out and flood the market with oil while the prices are still relativly high compared to the trend, and they race to get it out, and sell it at cheaper prices out of fear? Might not play out that way, but is a possibility? I think so.

I say remain long with only the “houses money” for your dividend paying oil plays like BPT, PBT, PWE, etc… and perhaps on very quick trades, particularly those with “firecracker” type speculation. This is where you can also grab straddles/strangles on climaxing stocks.

Take most the stuff off the table as soon as you can. I’m sorry I wasn’t able to get this post out before today, but it’s not like I haven’t warned of oil increasing to it’s peak. Heck I knew this moment was coming, and the timing of it seems dead on if I’m right here.

Now it’s time for me to get smug and brag. I don’t feel like digging through all of my old posts and comments, but basically a month ago , I said something like I think oil has maybe a month left to go, and I think it will accelerate to it’s peak in a “climax peak/blowoff top” I thought unless something changed significantly, that oil would continue it’s momentum, but that it wouldn’t be able to sustain $135-140. It could go higher breifly, the price could peak before then, but that was the point that the refineries would not be able to support. (hat tip: crude broker who seemed to agree putting his number at $138). Well I believe that unless it runs up this week before it sells off, that the $135.09 appears to be the high till at least 2009. And I checked the date, and it was on April 22nd that I said I thought it had a month to go (okay I said “nearly a month” so I may have been off by a day or two!), Thursday the 22nd of May looks to be the peak. I’ve also said that things looked like they were beginning the early stages of a parabola top. I’ve brought up the Bakken in a post sparking a lot of discussion on it that followed. Now I’m saying protect yourself and get the hell out. buy some OTM puts, speculate on a few deeper OTM puts. Oil has dropped from $30 to $10 in the past, it can and does drop very significantly. I’m not saying it’ll lose a third of it’s value, but I am saying that it could lose nearly half it’s value from it’s peak priced in current dollars. That means possibly more if the dollar picks up some serious strength, less if it loses value. You all think I’m nuts, you all think I’m joking. Well screw you, I have the balls to say it, oil is going below $75, which will bode well for my $100, 94, $89 and $80 puts on USO, with various expirations. If I’m wrong, fine, I’m crazy, but I can’t tell you how clear this bet seems to me, as crazy as I know it seems to everyone else. This type of clarity doesn’t come that often. The pyschology and fundimentals, and technicals are all painting the same picture that the charts were telling me in shipping before stocks like [[DRYS]] and [[TBSI]] exploaded. It seems as easy as a bear sterns straddle after the $2 bid and the run up to $7.

I believe it made it’s top and it’s going to be an ugly top. I do not believe this is a dip to buy, I believe this will be a rip to sell… I guess time will tell.

Time for bets against oil. If you have an options account, I believe the best play is [[USO]] puts. Unfortunately there’s tons of implied volitility here, so short is okay if you can handle the swings, but I still believe puts to be an acceptible option. There are several puts that look great. I’d scatter a few on various months. If you have limited capital, start with betting on some June or July puts. My general rule of thumb is to not fight time decay and never buy any option that is within 30 days of expiration, but I make exceptions if I only plan to be in the trade shortly, or if I have a lot of conviction.

As an indirect play, you could go long the airlines, but I believe that is always a bullshit idea. Going long the refineries is also an option, up to this point I reccommended a put on VLO, which has been a nice timely hedge against my timely bet against oil but I will be selling some this week to take profits. If the drop in oil manifests, then you can start looking at refineries that show strength, but right now selling seems more logical. You also may consider an indirect play on oil via long transportation. Long autos is acceptible, beting on consumers with bikes to buy a car, but it is possible for oil to drop and gas prices to remain fairly the same. Thus the always fuel effecient Toyota [[TM]] seems like a good play.

If oil declines this week, continue to add to short USO position, or to your puts. if the first week of June there’s no decline, I’d stay long for maybe midway through the next week and I’d be willing to dump it and pretend I never said anything.

To Review: Oil will fall because of strengthening dollar, increased production increasing supply (discoveries like Bakken, Brazil, etc), decreased demand (price of oil, crack spread hurting refineries, babyboomers , people moving closer to work,etc), strong political issue - politicians working to make U.S. energy independant, technological innovation (oil from algee, solar power, wind power), China’s plan to add more wind power by 2020 (potentially making wind power a good play if you can find one) automobiles increased production of more fuel effecient vehicles, the 20/10/5 rule indicating the run on commodities is nearing an end (20 year run in stock market from roughly 1988 to 1998 and the following 10 yr commodity/oil/gold/silver run should go from about then till somewhere between 2008-2010), increased awareness of neccesity of oil conservation, fear and scarcity driving it artificially high, and people arrogantly thinking that oil will never in history ever go below $100.

Maybe buying oil stocks is the easiest trade in the world, and I’d be retarded to short it. Maybe oil will never go lower for very long. Last lengthy decline was July 2006 to Jan 2007, it can and has gone down, I think it will go down for a year much more significantly. If I’m proven wrong fine… I can deal with it. I intend on adding once I’m right, so I don’t get blown completely up if I’m wrong, but I am betting significantly in low oil prices.

But whatever, If I’m wrong, I encourage people to laugh at me. I was expecting to be lambasted, but recently I’ve seen more articles that seem to agree with me, reflecting a potential shift in market sentiment. If I’m right, then I’m laughing to the bank, and probably a bank that I just shorted.