Oil Hits New Highs… But Could Its Run Be Done?
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Editor’s Note: “There’s nothing like a $140 reality check to start your day,” says Dan Denning in The Daily Reckoning Australia. But could oil prices be the next Yahoo. Are oil prices all about hype just as troubled internet search engine’s stock price was? Are we heading for a major reversal?
Dan’s right about one thing, at least. Crude oil prices are sky-high. Prices hit $142 a barrel today.
Crude contracts on the Nymex for August delivery his $142.26 a barrel before — only a few hours after it breached the $141 level.
Crude oil is now nearly 50% more expensive than at the start of the year.
Attacks by rebels in Nigeria, fears of an Israeli air strike on Iran, rumors that Libya is going to cut supply, a weak dollar and a refusal by the Fed to do anything more than voice their ‘concerns’ over inflation — all of the above are sending the black goo soaring.
Is Oil the New Yahoo: Oil’s Run May Be Done
By Dan Denning
That’s what the oil price reached overnight in NYMEX trading. But before you go predicting US$200 by the end of the week for a barrel of crude, a quick story down the digital memory lane. On January 4th, 2001, Yahoo stock (NASDAQ: YHOO) climbed over US$500 in intraday trading. It closed below that. But just a few months earlier one of our colleagues had speculated that YHOO was cheap at $400 and fairly valued at $500.
Yahoo was a stock everyone respected (whatever that means). It was safe to like. And it was not some start up Internet outfit. Everyone used it and everyone liked it, even if no one was sure how much advertising revenue search engines would eventually generate for shareholders.
Our colleague’s price forecast wasn’t based on any metrics that we recognised at the time. He was using what everyone else was using, eyeballs, page hits, clicks and all the buzz words that Internet companies used to justify astronomical multiples to trifling earnings (when there were earnings at all).
Yahoo shares were so in demand that the stock split 2-1 in February. A month later, the high was in for the NASDAQ at 5,048. It closed yesterday at 2,321. Yahoo has had its own troubles since then. It’s now a US$20 stock.
Is oil the new Yahoo? You can make a good argument for higher oil prices based on how tight the supply chain is. But right now, the oil price is going up on just about any little rumour. The market has ceased to be rational about it. Even oil insiders are trading predictions about how high it could be by the end of the year.
But maybe-just maybe-we saw oil put in its high for the year over-night. Mind you, we remain a long-term energy bull for those very same unfavourable supply-demand dynamics mentioned above. Based on our experience, though, this is a market that feels really toppy. Our intuition is that you could see oil put a top in sometime in the next week, if it hasn’t already happened.
Not that you want to step in front of a moving truck. Markets can remain irrational longer that you can remain solvent, the old saying goes. We’re not suggesting you bet against oil. But we are suggesting you take note of the sentiment. The bears have almost totally capitulated. The bulls are being whipped into froth. When any little thing drives the price higher, you have a very dangerous market.
Source: Is Oil the New Yahoo: Oil’s Run May Be Done
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Tags: Crude Oil Prices, Dan Denning, Investing In Oil, YHOOAbout the Author
Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.