Hindsight isn’t always 20/20

If there’s one thing CNBC and the Wall St. pundit, self-proclaimed “analyst” crowd is good at (and, trust me, there is only one thing) it’s retroactively applying fundamentals to explain current price movement. I mentioned this in my last post about oil as it related to their constant talk of oil supply shortages and the world’s impending dry up of oil supply/out of control oil demand back in July 2014 when WTI was over $100/barrel – then suddenly just a few months later WTI had dropped in value by 50% and the pundits were attributing it to a “supply glut” and no oil demand. They flip and flop like this when “analyzing” large price movements of any commodity or equity, desperately cherry picking fundamentals after the fact in an attempt to find a “logical” explanation for major movement that really can only be explained by trading action. The idea is to maintain the belief amongst retail traders/investors that price movement is always dictated by fundamentals, never simply by smart money slaughtering dumb money (which is actually what dictates short-term price movements). This false application of fundamentals keeps the efficient market theory alive – the idea that the current price is always the “correct” price from a fundamentals perspective. While this practice of flinging random fundamentals at a price move and seeing what sticks is used everywhere, it’s more visibly absurd with oil because of how volatile the price of oil typically is. It takes quite a bit of skill (or stupidity) to be able to flip-flop on fundamentals analysis fast and hard enough to keep up with oil price fluctuations, which brings me to my point…

On my ride in to work this morning, the gas station I typically buy my gas at had 87 octane posted at $2.03/gal (sucks to live in CT, I know). On my way home, it was $2.22. Every gas station on the ride home was up fifteen to twenty cents. What happened in eight hours to justify that? Let’s take a look at the price of US crude (WTI):

WTI

Ignore today just for a second. In the three trading days from last Thursday (the 1/29) to yesterday (2/3) the price of oil rocketed up almost 25%. Why? CNBC and market pundits everywhere can’t stop talking about the oil glut. We’re just swimming in oil that no one wants and that’s why oil prices have drilled themselves into the ground (zing!) – so says the pundits. Hell, we just got another report showing yet another increase in oil inventories… but oil shoots to the moon in the course of only three days. Did the fundamentals change? Nope. Did the glut go away (pretending it existed in the first place)? Nope. Did demand increase? Nope. This increase was so absurdly large and out of the blue (ignoring technicals) that CNBC didn’t even bother trying to fabricate an explanation this time. They’re writing it off as “price volatility”, a funny explanation for a 25% swing, coming from the guys that want you to always believe the current price of anything is the “correct” price. In fact, I already explained these kinds of price swings in my last post. The retroactively applied fundamentals used to explain the huge plunge in oil prices are a farce. Yes, as I’ve pointed out many times, the price fall is in large part due to Saudi Arabia’s actions, but the effect is a mental one more so than a fundamental one. As my last post showed, the extra supply from new US and Russian wells is not even remotely enough to explain the massive depth of the preceding four months’ price decline. The psychological effects of Saudi Arabia’s policy, however, were more than enough to fire up the speculation machine. It’s that rampant speculation and gambling that drove WTI down over 50% in four months and the same rampant speculation and pure trading pressure drove it back up 25% in three days (and, just as suddenly, back down 10% today). What’s been created is a herd of individual traders buying and selling not based on fundamentals, but on what they feel the rest of the herd will do. This is the basis of a market that has become almost completely disconnected from reality. Don’t buy into the falsely applied fundamentals, slapped on after the fact in an attempt to write a retroactive narrative long after the events have transpired. The vast majority of oil’s movement has been and continues to be purely trading pressure. Oil’s fundamental picture has not changed significantly in almost a year. The efficient market theory is bunk – the current price is not always “correct”. Once you realize that, the unanswered question remains what it has been all along: was oil over-priced in July 2014 or is it under-priced now? Based on an objective look at the fundamentals, it cannot be both. Figure out the answer to that question and you’ll know where oil is headed in the long-term.

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