"Swimming in Crude"
“Elles mangent, elles meurent,” a French molecular
biologist recently explained, “et beaucoup n’ont jamais de
“So they eat and they die…and many of them never have
sex?” your puzzled editor echoed back to her, just to be
sure that he had translated her phrases correctly.
“Oui,” the biologist replied, then switching to English,
she continued, “and those that DO have sex do not have what
we would consider ‘good sex.'”
Our matter-of-fact molecular biologist was not summarizing
the plight of humanity; she was describing the approximate
lifestyle of a trout.
“By human standards, the trout has an insipid sex life.”
she continued. “The female trout simulates orgasms (also
known as “faking it”), solely for the sake of enticing the
alpha males to fertilize her eggs (in an external way, of
“So that’s it?” Your editor replied. “That’s what a trout’s
life is like?…Hmmm…seems rather bleak. Is there
something in particular that I should infer from these
pathetic details of a trout’s sex life?”
“Only if the inference seems appropriate,” she smiled. “In
the laboratory, you know, we study diabetes in trout,
because this species reacts to the disease very much like
“Really?…I had no idea we were so similar,” your editor
replied. “I wonder if there are any other relevant
similarities between trout and humans.”
“Well there are a few other biological similarities,” the
French PhD continued. “But I assume you are much more
interested in metaphoric similarities.”
“Sure,” your editor admitted, “You’ve got your profession
and I’ve got mine…Let’s see, I think I’ve thought of a
couple similarities already. The average trout, for
example, is very much like the average investor. It travels
in groups and it chases after shiny things.”
By Eric J. Fry
For the past couple of months, investors have been
frantically chasing after oil stocks – the shiniest and
tastiest prey in the stock market. But the feeding frenzy
has reached a dangerous stage. Oil stocks are no longer
easy prey; they are barbed lures.
We fear that investors who continue to strike at these
shimmering equities will soon find themselves gaffed,
filleted and pan-fried.
For many months, your editors here at the Rude Awakening
have been ardent and faithful fans of energy stocks. We
still are…for the long term. But for the near term, we’ve
become a bit nervous about them.
The group has become much too popular for its own good. The
same oil stocks that so many “experts” now advise buying
are the very same stocks that the experts feared buying one
year ago. But, of course, that’s when savvy investors were
buying them. Most major oil and gas stocks have advanced at
least 50% over the last 12 months – gains that seemed
entirely appropriate in the context of $65 oil and $13
Unfortunately, some of the bullish fundamental trends
within the energy sector are beginning to erode. Supplies
of crude oil, for example, are beginning to swamp demand.
And even the “tight” gasoline market may be somewhat less
tight than widely advertised.
“We are swimming in crude oil right now,” one oil analyst
remarked last week.
Indeed, we may be drowning in it, according to the latest
inventory data from the American Petroleum Institute (API).
The charts below show U.S. crude oil inventories from two
different perspectives. From either perspective, crude oil
supplies are ample – so ample, in fact, that crude oil may
struggle to hold above $60 a barrel, or even $50 a barrel.
The first chart shows U.S. crude oil supplies in terms of
days of demand. As of last week, the U.S. held more than 20
days worth of demand, comfortably above the 6-year average
of 19 days of supply…and well above the levels of the two
The second chart presents U.S. crude inventories as a
percentage of the six-year average inventory level. As of
last week, inventories were 106% above average for this
time of year – the highest such reading in six years.
Apparently, $65 crude oil has a way of coaxing additional
supply into the market.
has been falling. U.S. gasoline demand averaged 8.8 million
barrels a day during the past four weeks, 2.8 percent below
the same period a year earlier.
Rising supply, coupled with falling demand, is not the
typical bull market equation. To the contrary, the
deteriorating “technical condition” of the crude oil market
suggests that yesterday’s steep selloff will not be the
last steep selloff. An ominous “head and shoulders”
formation has developed on the price chart of crude oil.
week, “The September bounce has fallen well short of the
late-August peak (the head) and is about equal to the early
August peak (left shoulder). It’s now challenging its 50-
day average and may be headed for a test of the neckline
near 62.50. A close beneath that support line would turn
the short-term trend down. That would weaken energy stocks
“I’m not suggesting that the long-term bull market in
energy is over,” Murphy continued. “I am suggesting that
it’s come too far and is in need of some correcting. I also
believe that the price spikes from the two recent
hurricanes have probably been overdone. What better time to
take some energy money off the table when TV stations are
talking about nothing else. One TV station showed a chart
of the XLE yesterday and said it was a good thing to buy
when oil prices are rising. That’s the ‘kiss of death’ in
We agree…and we would imagine that the kiss of death
would be even less enjoyable than the kiss of trout.
And the Markets…
WTI NYMEX CRUDE