NEW YORK (
) - I've watched the oil move with a bit of pride, I have to admit.
After all, I predicted $110 a barrel prices for the second quarter of 2011 (check the videotape), and I did it in the third quarter of 2010, when oil had barely reached $80. Hitting a target mark is a great moment for reassessment and I've been doing that: For the past several days, the oil market has looked exhausted to me, looking like it needed a break.
Buy Integrateds, Dump Oil Services: Dicker
A couple of pretty solid and interesting moves in and around oil make me fairly convinced that oil is just recharging for another run, one that will take it up to perhaps $120 by the third quarter of this year. If that happens, those integrated oil stocks that have already been market leaders will streak even higher.
First, we have
. For very obvious reasons (mostly because it makes so much damn money trading oil), Goldman has been very careful about the way it talks talk about speculation in the oil market.
In 2008, at the height of the first oil boom, Goldman clearly stated that speculation had nothing to do with rising prices. The subsequent bust in 2009 forced them to recant that blanket statement, although it's done it exceeding carefully, only admitting to a $9.50 speculative premium even at the height of the boom in 2008, when oil reached $147 a barrel.
It makes these insanely conservative estimates using the CFTC's commitment of traders reports and some black magic calculations of what effect each reported non-commercial holding has on average price, figuring that each million paper barrels of speculative holding delivers an eight-cent premium to oil's price.
Don't ask me how it comes up with that number: Remember we're talking Goldman here, so it must be right.
But here's the thing: Even in the way the underestimated-world-of- speculation effect that the oil traders at Goldman Sachs live under, a recent note from its commodity division noted that the risk premium, considering all the unrest in the Middle East, is being greatly UNDERVALUED -- even here at $104 a barrel.
Undervalued? According to Goldman? That should give anyone pause.
Oil service stocks are another big reason to predict another leg up for crude. In the past two weeks, the drillers have made monster moves, even outdoing other parts of the oil sector that have been rallying with crude.
In a note from
Bank of America
this week, we get some indication why: Besides a slow but steady restoration of Gulf of Mexico permitting, Bank of America predicts that rig counts in Saudi Arabia will increase 30% in the next eight months -- an enormous increase.
Why does Bank of America see this possibility? It believes the Saudis will have to pump more oil to increase jobs and increase their coffers for further incentives to quell a rising public outrage against the monarchy. Someone in Saudi Arabia is still quite frightened by further "day of rage" threats yet to appear.
Throughout the spread of revolutionary fervor running from Arab state to Arab state, it has always been the risk of the contagion reaching Saudi Arabia and/or Iran that has been the deepest threat to real supply slowdowns in the Middle East.
I have been on three conference calls organized by three different investment banks in the last two weeks, all analyzing the disruptions in the Middle East and North Africa and parsing its effects. On each call, each presenting bank included their own Saudi expert, assessing the likelihood of revolutionary contagion spreading to the Kingdom. In all three calls, their experts were "100% sure" that no widespread protest would erupt in Saudi Arabia.
What's a trader to do? When every expert gives you a 100% guarantee that something isn't going to happen, I just naturally start to look at the trade that says it can. Either
are tremendous sales right here, or something is more likely than the "experts" are guessing.
And the oil market is showing it. After making such a massive climb, oil should have moderated a bit more positively, instead of staying pretty much right here, in the $103-to-$105 region. What happens when a market can't go down? Most of the time, it goes up.
I've seen enough. I think oil is taking a breath and readying for another move higher. With first-quarter reports about to start, I think it's time to reload again on big oil:
and my favorite,
They'll continue to move higher as oil does. And I'm starting to believe that oil will.
At the time of publication, Dicker owned Baker Hughes and Exxon Mobil.
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