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Minyan Mailbag: Energy



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Reamer -

I would love to hear your thoughts on energy. I suspect that you would be rather cautious or even bearish right now given your views on deflation.

I don't think I ever hear a bears perspective on energy. In fact, I'm not sure if energy has any bears. Seems like a completely one sided thought process towards a long term secular energy bull market.

Maybe it is, but I'd like to hear the logic of someone who might question that belief.

Enjoy your stuff,


Minyan Jim,

Though I have my own thoughts on the energy sector and the various theories proffered for the bullish case, I simply do not follow the sector closely enough nor do I have enough experience with the manner in which it trades day to day to have a confident prediction. That said, you have noted some characteristics of the current debate that I have noticed too, and they do allow me to have some opinion, even if it is not a strongly held one.

Because markets are non-linear, factors like supply and demand are a mere subset (and probably a small subset at that) of a much larger set of factors that influence the price of the commodity itself. The bullish case that supply is dwindling amidst substantial (ever-growing) demand from Asia (China) is well worn. That you (admittedly anecdotally) do not often hear anything but the bullish call for higher energy prices may be speaking volumes as well; turning points in markets are, axiomatically, defined by the point at which the greatest number of market participants embrace that existing trend. Complexity theorists call these points bifurcations.

You alluded to my generally deflationary views and, in the case of oil prices, I do not waver. I believe what energy bulls underestimate in their linear econometric supply and demand models (which are flawed from the start because they are linear to boot) is the demand side. Demand has been stimulated by record liquidity over the last few years by every central bank in the world. This liquidity is artificial, just like the prices of the commodities that benefited from it. Gold, copper, soybeans, oil: each have benefited not from shrinking supply (though admittedly that is a long term issue that - eventually - will benefit prices on a secular basis) but from artificially induced demand. By a world awash in money.

So net/net, the same deflation that I see affecting the equity and debt markets in time, I expect to affect commodities generally and energy specifically. When you see financial media pundits speaking about "how low oil can go" in a few years, that's when I will be bullish on the sector.


Prof. Reamer

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