Black Gold – Texas Tea

I congratulate everyone who predicted crude oil futures contracts would make it to $125/barrel. Today, NYMEX traders once again bid up the price of crude to stratospheric levels. After the bell, oil settled at $126.29/barrel. Perma-bear prognosticators predicting $100 were laughed off the sets at CNBC 3 years ago. Today, they get top billing with even more insane predictions. Those calling for $200/barrel oil don’t seem so crazy today. (Right now, the Clampett’s could be a little miffed they had sold out so soon. Instead of living in Bevery Hills, they could be sporting a new highrise building in Dubai.)

On a percentage basis, $200/barrel oil is quite possible. Think of it this way. Five years ago, the price of a barrel of crude was $30. Today, it closed 320% higher than May 2003 prices. If crude goes to $200, that’s only 58% higher. Not nearly as steep a climb as the past half-decade. Now that venerable investment bank Goldman Sachs has jumped on the energy-pumping bandwagon, calling for $141/barrel oil by the end of the year, even more investors are buying into the trend. Two hundred dollars, here we come.

Given the current market environment, it’s an easy line to buy. The Fed floods the economy with electronic dollar bills while U.S. equities stagnate in a credit crunch-induced recession — this causes energy to rise. Your monthly gas bill goes up, much higher than it was last year, with no end in sight. Bush visits the Saudi king — the princes promise to increase production and crude still rises. The U.S. Department of Energy says it will stop stockpiling crude in the Strategic Petroleum Reserve — yet oil goes up even more. Nothing seems to stop the price of pumping West Texas Intermediate out of the ground. When will it end? Goldman says “not this year”. Who are we to argue with Goldman?

Still, the hapless investor scratches his head and says, haven’t I seen this before? Didn’t I buy a bunch of tech stocks in the late 90’s only to get burned in the Crash of 2000? And what about the recent run in real estate? REITs were all the rage a few years ago. Cashing in on triple digit returns for leveraged investments was par for the course. Yes, it was great for awhile. But the risk-piper must be paid. Crash goes the fund and so also your hopes of retiring early.

Point is: every bull market eventually gets crowded. Every single one. When that happens, and sentiment turns, then someone is left holding the bag. For now, energy dominates the financial headlines. Fortunes are being made and oilmen are getting stadiums named after themselves once again. But one day it will end. Take advantage of the trend today, but prepare accordingly for the inevitable.

Have a great weekend.