Tuesday, December 7, 2010

Crude Oil is Projected to the Moon

12/6/10

Conoco Phillips (NYSE: COP) is not singing “Hold-On” by the unrelated 90’s pop super group Wilson Phillips because times look tough, oh no.  They are poised to hold on to see if oil will catapult well over $100 a barrel.  Goldman Sachs (NYSE: GS) announced oil would average $110 per barrel in 2011.  Morgan Stanley reiterated a day later speaking in a similar tone.  A call-to-arms for a press release!  It is hard to fathom two broker/dealers, who make money if clients trade, would ever call for the masses to jump on the ride, even if it was only mentioned nonchalantly.

Fundamental analysis in the oil market shows a lack of supply heading into 2011, according to Goldman Sachs.  The Energy Information Agency (EIA), who provides data on oil “stocks,” shows and increase of 5.5% year-over-year in crude oil supply.  The oil futures contract was trading $15-20 less per barrel at this time last year.  Today the market is flirting with $90. 

When brokers are screaming to buy oil from the mountaintops, maybe it is time to buy the brokers instead.  Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS) and MF Global (NYSE: MF) are in the business of profiting from the oil trade in two ways.  The first is to have assistance in driving oil futures prices higher by gathering a bullish consortium of market participants, which include retail and commercial traders, and working the market from the buy-side.  Contrary to popular “conspiracy theorist” belief, the brokers do not have enough power behind them to push the market entirely by themselves.  They need sell-side participants to help even out the market orders.  The sell-side orders come from end-users who need to hedge production and attempt to “lock-in” future input costs.  Second in the profit channel is trading for company accounts.  Who is the best at knowing when bullish inflows are drying up?  The brokers who see the order flow would be an educated guess.  When orders on the buy-side cease, the broker/dealers will turn their position to the short side.  They will also take those sell-side order commissions on the way down.

The argument from a broker/dealer perspective, and it is a valid point, is the simple phrase, “free-markets.”  Anyone possessing a trading account is capable of accessing the markets and participating by broker assistance or independent order placing.  This may be true, but several variables exist for every investor.  Take a look at the big picture.  Manage risk, and take a hard look at the brokers.


Disclosure: Unless listed following this disclosure, DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations.  Copyright 2010 all rights reserved.  All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. There is a risk of loss trading equities, equities options, futures and futures options.  Past performance is not a guarantee of future results.

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