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Blogger Tom Kloza: Why Excess Sentiment Is Key To Oil Prices

Chief Oil Analyst, OPIS
Tom Kloza
Chief Oil Analyst, OPIS

This is the second of three posts today from guest blogger Tom Kloza. Tom is Chief Oil Analyst at OPIS (Oil Price Information Service) and has his own blog.He has been writing about downstream oil markets since 1975 and was among the founders of OPIS over 25 years ago.

We just moved through an interesting cluster of days. The week brought a shutdown of a North Sea crude oil pipeline; some damaging strikes in Nigeria; and some relatively strong performances for global stock markets. A month ago, this would have created an updraft of $10-$20 bbl for crude oil. Yet U.S. crude oil futures prices could not climb beyond the $119.90 bbl range. Why not?

Part of the answer is hidden in the tide charts--May is much less hospitable to high crude oil prices than is April. But a greater factor may be the excess sentiment.

There is a widely regarded survey published by Market Vane, called the Bullish Consensus. Market Vane regularly contacts money managers each day and queries them as to whether they are bullish or bearish on a given commodity.

Through most of my career, a sentiment reading of over--say 70%--has represented excess. If one sold most commodities when the bullish consensus surpassed 70%, one could probably construct a hollowed out volcanic lair in one’s image, or run for Congress.

The bullish consensus numbers for crude oil futures have been over 90% for much of late April. When everyone is bullish about the likely price outcome, it often means that there is no one left to buy.

But let me take a moment to revisit the notion of the greatest fundamental in the oil markets: the money flow. Data from the Commodities Futures Trading Commission (CFTC) released last Friday indicates that about $26-billion more money among non-commercial traders (index funds, commodity pools, hedge funds, etc.) is bet on the long side (representing speculative buying) of various oil futures. Global supply and demand data sets suggest that there are some fallacies in the “there-is-nothing-but-safety-in-owning-commodities” theme. That sense can change in an instant.

U.S. demand is certainly taking some lumps. California is one of the few states that regularly (but on a 90 day delayed basis) actually shares gasoline sales’ figures. This week saw the state release January 2008 taxable sales data. The numbers show that Californians used 4.5% less gasoline than they did in January 2007, which equates to a drop of 58.2-million gallons. These are stunning numbers and deserve some attention.

Questions? Comments? energysource@cnbc.com