Oil and gas: What’s the story for 2007?

It’s funny how every bull market has to have a fundamental story wrapped around it before it can be sold for public consumption. Much like a candy bar at a convenience store, a bull market in stocks or commodities is always packaged with an enticing wrapper designed to lure prospective buyers and ensure its quality to the consumer.

The financial markets operate on much the same principle. A steady upward trend in prices in a major commodity such as oil or natural gas is never conveyed to the public through the mainstream press unless decorated with the most glowing terms to explain just how and why prices are rising. (To a momentum or trend trader, of course, it doesn’t matter “why” prices are rising – merely that the fact that they are rising is all he needs to know). But the public is a little more demanding than the mere speculator and must always have answers to explain the supposed reasons behind any bull or bear market.

By concentrating on just the major trends in the oil and gas market of the past 30 years you will see that every major move in the energy sector has been “wrapped” in some fundamentally-based story of one sort or another. The rising energy prices of the 1970s were accompanied by a plethora of news stories and best-selling books describing the impending “oil shortage” and other energy-related scary scenarios. Everyone was told back then that America’s oil and coal reserves were being rapidly depleted and that so-called “fossil fuels” would vanish within their lifetimes. Miraculously, these scare stories vanished into thin air when the disinflation of the 1980s gained a foot hold over the financial markets, and even more scarcely were these stories heard during the deflation of the late ‘90s.

During the brief encounter with deflation of the late 1990s another type of story was commonly repeated in by the popular press, but this time it was quite the opposite of the stories that were heard 20 years earlier. Instead of depletion, news articles and books began appearing that spoke of super-abundant natural resources. At one point, the top selling book on Amazon.com mentioned the discovery of “self-replenishing” oil wells that would supply a continuous glut of fuel and guarantee super-low energy prices for decades to come. The book’s appearance coincided with the exact low in the oil price at around $10/barrel.

During the brief encounter with deflation of the late 1990s another type of story was commonly repeated in by the popular press, but this time it was quite the opposite of the stories that were heard 20 years earlier. Instead of depletion, news articles and books began appearing that spoke of super-abundant natural resources. At one point, the top selling book on Amazon.com mentioned the discovery of “self-replenishing” oil wells that would supply a continuous glut of fuel and guarantee super-low energy prices for decades to come. The book’s appearance coincided with the exact low in the oil price at around $10/barrel.

Today such talk is almost never heard and if it does happen to be mentioned it is laughed off with contempt. A resurgence of the doom-and-gloom oil shortage scenarios from the 1970s has made its way in the popular literature again. It’s currently fashionable to talk of “peak oil” (or even more recently, “peak gas”). Yet how much longer will such talk last? Probably until the oil price makes another plunge or else fails to make a new high within five or six months.

Goldseek