Massive Reality Disconnect

Energy and Capital (12/03/2008)
"Oil and gas, which are part of the very foundation of the real, physical economy, continue to get hammered by traders as if they were no different from any other wacky financial instruments we have invented. As oil finally dropped below $50 and stayed there, the whispers about $20 started going around. Vague fears of a reduced outlook for global oil demand, still not verified by the data, have caused oil prices to overshoot far to the downside.

It's as if traders either don't know, or simply don't care, that oil is already below the production cost in those marginal areas where essentially all of the growth in world oil production must come from (if any). If the chart says it could go back to $20, then they believe it could go back to $20.

Such thinking, confined by conventional wisdom and removed as it is from any sort of real world knowledge of petroleum geology, is not only wrong, it will also prove very costly to those to follow it.

On the other hand, one can go broke trying to tell the market what to think. If the market believes that oil's going to $20, then for a short time at least, it probably will. It doesn't pay to buck the trend.

What does pay is knowing when the turning point is about to happen, before the herd heads in a new direction."

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