Loading...
Symbols:
Authors:

John Hussman: Is There a Possibility of $60 Oil?

by: John Hussman July 08, 2008 | about stocks: DBO / DIA / QQQQ / SPY    
John Hussman

John Hussman

About this author: Author's firm:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Excerpt from the Hussman Funds' Weekly Market Comment (7/7/08)

The main factors influencing the outlook for broad inflation are that the U.S. economy is most likely in a recession, consumers are unusually strapped because of both mortgage debt and tight budget constraints, international economies are beginning to weaken, and credit concerns remain endemic. We should not exclude China from the risk of economic weakness, particularly given that the Shanghai index is already down by well over half since last year's highs. Stock markets typically don't drop in half without economic repercussions. Meanwhile, U.S. government spending, while still undisciplined, is relatively stable and not expanding rapidly.

Given this context, we have a combination of weakening demand for most goods and services as a result of consumer restraint, accompanied by a generally firm demand for currency and Treasury securities (particularly short-dated bills) as safe havens from credit risk. That combination is disinflationary, and it is likely that we'll observe further downward pressure on inflation outside of the food and energy groups over the coming quarters.

On the subject of oil prices, it's clear that elevated gas prices have been a factor in the terrible consumer confidence numbers recently. Still, my view remains that broadening economic weakness and an unwinding of speculative pressures will combine to produce steep declines in commodities prices, most probably by the end of the summer season.

...

In my view, the problem will emerge a few months from now, as a) economic demand softens further, b) planned production hikes actually emerge, and c) weakening price momentum encourages speculators to close long positions instead of rolling them forward. At that point, I expect that net speculative positions will plunge by 10-15% of open interest and we'll see a sudden glut on the market for spot delivery. It should not be surprising if this speculative unwinding takes the price of crude below $60 a barrel by early next year.

Related Articles

This article has 10 comments:

  •  
    Jul 08 12:03 PM
    refreshing to see someone actually thinking about future supply-demand dynamics instead of the now oh-so-common dumb repetition of peak-oil-hype (where the only question discussed is when oil will break 200$, 400$,...)
    Reply
  •  
    Jul 08 09:22 PM
    What makes you think that say Libya or some of the other OPEC countries will not lower their supply to match the lower demand? How do you know that China will not use their reserves to start increasing their own strategic reserves once oil starts to drop in price?
    Reply
  •  
    Jul 08 10:54 PM
    why stop at $170/bbl? why not $200? $300?

    i'll tell you why....

    because the world economy would cease to function. no economic activity = falling demand for oil = lower oil prices. that's how it works, peak oil or no peak oil.

    you're in no position to call anyone a jackass.

    Reply
  •  
    Jul 09 01:09 AM
    There is always the possibility of Hurricanes or another oil war affecting oil prices but barring that my only complaint is I wish you explained both the how and the why of your numbers better.
    Reply
  •  
    Jul 09 10:58 AM
    Geez - I could have written this tripe...OPEC is searching for the point of diminishing return...right now they have oil over $100 which is a price point they have wanted...as demand curbs - so will production, they won't flood the market with product - NO manufacturer would do that... So unless the global economy tanks - OPEC will keep their finger on the pulse to ensure optimal pricing. I'd love to see $60 oil...but we are along way from that at the moment...
    Reply
  •  
    Jul 09 04:19 PM
    Opec is not the only source of oil.

    I also suspect it could go to 60 or even lower. Two years ago everyone was saying housing was merely slowing it's pace of increase and anyone that said it could or would drop was a "doom and gloomer".

    Well, so was Isaiah.

    If we stop buying, China stops making, and if China stops making, China stops importing from other small countries. There is no disconnect. And as we all get used to using less oil, and worldwide demand plummets, I would not be surprised to see the price pendulum swing the other way. And as someone else said, a swinging pendulum does not stop at equilibrium.
    Reply
  •  
    Jul 09 06:38 PM
    Starkoski is troubled participant. He continues to speak about "Peak Oil" as if he's M. King Hubbert himself. Flow rate is not the only factor in the price of oil, even starkoski should know better. (Though he apparently does not.) Supply and demand is a factor, and nothing in supply and demand suggests oil doubling from $70 to $140 in a single year. Dollar destruction is a factor, and in the near term, it may indeed appreciate against world currencies. Speculation is a factor, and with 20 times more oil being traded than delivered, speculators have moved from dot-com to real estate to commodities. Psychology is a factor, and everyone has been pushing the long side. But if there's enough of an economic slowdown, a push to drill, a push for alternatives, oil can and will come down in price. John Hussman is not only credible, he's a fine money manager. Starkoski, get a grip.
    Reply
  •  
    Jul 09 10:40 PM
    I have to throw my hat in with the energy bulls on this one. Yes, I think oil can, and probably will correct...perhaps even sharply, but I can't quite see $60/bbl. I'm thinking $90/$100 bbl as the new "floor", and will continue to be overweight energy as a long term (up to 5 years) position.

    Jan
    PS: I agree that Hussman is a good manager, and read his stuff faithfully.
    Reply
  •  
    Jul 10 07:58 PM
    Dear U51169,

    I am troubled because I read comments from you & others that take your position that oil is going to $60/barrel & oil is in a bubble and yet we are facing the biggest problem that the USA & the world will ever face which is Peak Oil. I am also troubled because I don't know what I am going to do with all the money that I am making from you and other investors that are betting that oil is going to $60/barrel. I have been shorting any company that has high oil costs and I am long (every Penney I have) in companies that produce oil, nat gas, coal, uranium and even alternate energy - oh food too. I have been doing very well thank you and I will continue to do well because oil and the other energy sources are going to the moon. As far as Dr. Hubbert well he was right about the USA peaking in oil production in 1970 and he is right about the world peaking now. Now let’s talk about supply & demand. A 4th grade class would understand this - that total petroleum production (including nat gas condensates and syn crude) is 85 MB/D and total world demand is 87 MB/D. This is why oil has gone from $80/barrel to $140/barrel in 6 months or so. These numbers come from T. Boone Pickens, Matt Simmons the IEA & other people who are competent. So where are you getting your supply & demand figures from - CERA or Bozo the Clown? Now I am sure that Mr. Hussman is a very nice and professional type but I don't think that he has a clue that the 5 largest oil fields in the world are in terminal decline & that world oil discovery peaked in 1963. That out of the 65 largest oil producing nations in the world- 54 is in decline. And that the quality of the existing oil produced in the world is of constantly less quality (sour crude) hence less net energy or oil production. Now about flow rate. People like you also like to talk about how much oil is available in known in ground reserves which seems like allot but remember that in ground reserves mean nothing because it is all about how much oil can you get out or the ground and what is the EROEI (energy return on energy invested). This is why our country is in big dodo and we have guys like you that singing happy songs about oil supply and demand when demand is 2 MB/D over supply and going to constantly getting worse every year forward. So U51169 I respectfully disagree with you & please reconsider the real evidence and learn about the facts and get educated so our country & our communities & our families can start the real responses to this horrible dilemma before it is too late.


    On Jul 09 06:38 PM User 51169 wrote:

    > Starkoski is troubled participant. He continues to speak about "Peak
    > Oil" as if he's M. King Hubbert himself. Flow rate is not the only
    > factor in the price of oil, even starkoski should know better. (Though
    > he apparently does not.) Supply and demand is a factor, and nothing
    > in supply and demand suggests oil doubling from $70 to $140 in a
    > single year. Dollar destruction is a factor, and in the near term,
    > it may indeed appreciate against world currencies. Speculation is
    > a factor, and with 20 times more oil being traded than delivered,
    > speculators have moved from dot-com to real estate to commodities.
    > Psychology is a factor, and everyone has been pushing the long side.
    > But if there's enough of an economic slowdown, a push to drill, a
    > push for alternatives, oil can and will come down in price. John
    Reply
  •  
    Aug 10 09:28 PM
    There is only one problem with the bears' prognostications on oil. Unlike housing, it's supply is limited nor can it be produced by fiat.

    Both oil and gold have been in a bull market ever since the United States attempted its "reflation" in 2001. Simply inverse a chart of real interest rates and it tracks gold and oil beautifully.

    The bull moves in these unlevered assets can only end when the United States and the world makes the price of money acceptable and appropriate again.

    Bernanke thus far has shown you the route he wants to take is status-quo.
    Reply
More Comments on DBO »
More by John Hussman
Articles on related themes
Oil Price
Economy
Bonds
Dollar/Currencies