Oil: We now have a four handle

We discussed Oil on our morning call today. Our view have been consistently negative on the fundamentals of Oil due to the demand picture globally, we have also been of the belief that Oil should be set up for a bounce due to its oversold condition. While we have traded Oil successfully on the long side for some small gains this year, the trend is and continues to be down.

Oil as of today dipped below $50 per barrel (West Texas Intermediate), which is a three and half year low and more than 60% decline from the June 2008 “It’s Global This Time” easy money highs. In hindsight, which has become increasingly apparent, Oil, just like any commodity, will always retrace back to its marginal cost. The commodity has now fallen below its marginal cost, which was previously thought to be in the $60/65 range, due to shuttering of higher cost projects and a decline in services costs.

The culprit for the dramatic decline in the price of oil is both a massive deleveraging as large pools of capitals are forced to sell their commodity assets (the Harvard Endowment is one such example we have been hearing about) and weaker demand trends become reality. It seems that bullish news for the price of oil has no impact, as we noted in our last notes after OPEC announced production cuts. Earlier this week a group of Somali pirates (“Arggghh”) captured a Saudi Arabian supertanker and threatened a major transport lane and the market completely shrugged off the risk.

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