Lately I have been beseiged by whisperings of the terrifying crude oil crash that has to come due to the massive inventory accumulation. I am hearing more and more worry about how there will be no storage, and at that point, WTI crude will collapse.
The article titled “Crude Awakening: Why next week could be carnage for Oil ETFs” on ZeroHedge is a perfect indication of the fear that is circulating in the market.
Whenever I hear investors so certain that something has got to happen, my skepticism alarm goes off. It reminds me of this call a few years ago from a really great NYMEX Crude Oil trader. Actually I am not giving him enough credit… It reminds me of this call from the legendary NYMEX Crude Oil trader Mark Fisher:
Proving that we all get it wrong (even the great ones), WTI is trading $30 below the level Mark claimed it “would never go below in his lifetime.”
I don’t mean to pick on Mark – I have had more than enough terrible calls of my own. I just don’t go on National TV and make these sorts of aggressive claims. I almost feel like the whole Crude Oil collapse can be solely pinned on Mark. You just knew the Market Gods would never stand for this sort of arrogance.
We have gone from extreme confidence that crude would never trade below $80, to a point where no one can imagine anything but it slipping to zero. The worry has gotten especially heavy lately due the high inventory levels. There are tons of smart guys who are genuinely concerned about a further crash towards single digits. Guys as smart as Mark Fisher used to be, are making all sorts of dire predictions.
This sort of article is typical of the bearishness out there: “Get Ready for $10 oil” by Gary Shilling..
The ZeroHedge article about the massive explosion in shares outstanding in the USO Crude oil ETF piqued my worries. If there are that many dip buyers in crude oil, there is a potential for a big problem if they are disappointed with the lack of pickup in demand.
So I set about verifying ZH’s charts. Here is the first one with the price of USO versus the shares outstanding:
Sure enough, the shares outstanding has gone parabolic while the price of the commodity has plunged. This sort of behaviour seems unprecedented. But is it? What happened in 2008 when we experienced the last great collapse in the price of oil?
Much to my surprise, during that collapse, the shares outstanding also exploded higher. In fact, they went even higher than the current expansion. And not only that, the price of USO was higher then, so on a dollar basis, the creation of new USO units was even larger. Here is a chart that measures the USO price versus the dollar value of the shares outstanding:
During the last collapse, the dollar value of USO units outstanding was almost 60% higher than where it currently stands.
I don’t have a clue if crude oil is going to plumet due to all the inventories. I just know that anytime everyone is so certain that something will happen, it makes more sense to look for the opposite. Not only that, but we have to get back above $80 soon as I am worried about Mark’s health…
Thanks for reading,