Stephen’s comments the other day on the crude oil markets - admittedly an area I rarely venture to talk about - made me recall the halcyon days in the early spring when the huge question on everybody’s mind was whether or not oil would break the $100/barrel threshold, which at the time seemed impregnable after numerous failed attempts to break higher.

This was long ago enough that I was still watching CNBC on a fairly frequent basis, and I happened to catch an episode of Fast Money where one of the traders - I want to say Jeff Macke - said that being long crude just shy of $100 was the “hard trade” to make because nobody thought it would go significantly higher, and his training called on making the “hard trade” because on average, it pays off to go against the prevailing sentiment.

Around the same time, I was talking with an officer at the BC Investment Club who wanted to enable the club to gain exposure to commodities - the main problem being (besides the paperwork required), how can you be buying oil just shy of the outrageously expensive price of $100/barrel? The tentative plan was to wait for oil to pullback and instead funnel money toward metals or agriculture in the meanwhile. That motion got shelved for another week.
Crude never looked back, and has since rallied 30%.

In the interim, sentiment seems to have swung to the point where the only direction crude can go is higher. While commodities can (and often do) trend much more strongly than stocks, I want to take a step back and ask if there is too much exuberance in energy. We’ve seen data that suggests demand is being checked by rising costs (never thought you’d see the day?), we’ve seen a round of upgrades (most notably from Goldman Sachs), and we’ve seen energy become touted as the safest place to invest your money. Think about that last one for a second.
American automakers are cutting back on producing gas-thirsty trucks because consumers won’t buy them - at least not without gas rebate incentives and gas price lock-ins. Radio stations are no longer giving away concert tickets or vacations, they’re giving away gas cards. There is even evidence that Americans are using mass transit (!).

I’m not suggesting that $130/barrel is the top for crude; to do so would reek of hubris in an area where even experts seem to have but an inkling of accuracy on crucial supply data. I’ve read several books and papers that nicely demonstrate how expensive it’s becoming to find new oil, and I’ve looked at Exxon Mobil’s (XOM) Sakhalin II project - an extremely impressive, and expensive, feat of engineering. I’ve looked at what kind of work Saudi Aramco is contracting heavy infrastructure companies to do; it’s expensive, challenging, and says that they are having difficulty maintaining oil output at low costs. Last I checked, there were still billions of people in developing countries who are going to become large consumers of energy in the coming decades.
In short, there is evidence pointing to legitimate arguments for both lower oil prices, as well as higher ones. But the thing to wonder is, what kind of breakdown or disparity do you see in the sentiment between consumer demand and the market? I’m guilty of driving pretty much anywhere, but I know lots of people are cutting back, and this is in New Jersey, home of low gas taxes and wide budget deficits. At the same time, the growing bullishness in the crude pits seems to have been halted for the first time in several months - but only in the last week. I believe the hard trade, therefore, is to be short crude oil, and the fact that I’m wincing as I write that is most of the evidence I need.

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