August 13, 2008
The Facts
Almost on a daily basis we have people predicting what the price of crude oil will go to. Each gives us their reasons for believing their numbers. Over the past month I’ve heard numbers ranging from $80 to $200 a barrel, with occasional mention of higher numbers if certain major events occur around the world. And usually a time table accompanies the prediction, ranging from now to the end of 2008 to mid 2009.
My View
Most of these “expert” oil price predictors I am referring to are usually the owner/CEO and/or funds manager with some sort of investment company. In other words, someone who has something to gain with their predictions. On August 6 Aaron Smith, Managing Director of Superfund Financial Singapore, was on CNBC. He, too, has his own predictions. His company deals in diversified futures funds.
During the interview I listened intently, as I usually do, and with the introduction of Smith and his company, the word “futures” impacted me. And it was from that point of view I listened to the interview. The very first question CNBC’s Arnold Gay asked Smith was about his prediction that oil would go to $200 a barrel. Smith went on to “justify” his prediction, not failing to point out that oil is really up from a “technical” standpoint and that its normal for oil to have a “20 to 30 percent pull back” during its trip to $200. Smith finished his answer/response by saying “this pull back is a great opportunity for investors”. The interview was nothing more than a “commercial” for Superfund Financial Singapore, but Gay did mention that the company sounded more like a hedge fund, pointing out the huge risk that is associated with hedge funds. Naturally, Smith defended that position.
This interview reminded me all too well of the hundreds of phone calls I’ve received over the past 15 years from investors trying to get me to invest with them. Without fail, those hard core sales people were “extremely excited” about one particular sector or stock they wanted me to invest in. I never fell for any of this, but on more than one occasion, I did follow the particular stock they insisted had only one way to go and not once did I see anything near what the sales person had predicted. In most cases, the stock went down. But with oil, we can now safely say (with hind site) that if enough money is invested in oil futures the price will certainly rise very sharply.
To the point; if you are an investment firm, there is absolutely nothing to gain and everything to loose if you predict a commodity or stock price will fall. So how can they be believed? But if there is a proven track record on how to increase the price of oil and you use that same method, the odds are in your favor. Then with success, the investment firm can proudly boast their predictions were correct. And in this case, $200 oil.
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