Monday, February 11, 2013

Take the Steve Ludlum challenge

One of my very favorite bloggers is the wise and learned Steve Ludlum, aka Steve from Virginia over on the ZeroHedge.  I have long enjoyed his theme of the folly and misfortune of our waste-based society, as well as his aesthetic perspective on markets and money.

For a while now, he has been developing a theory that the triangle developing in the /CL crude oil futures is a kind of a fuse, with two mighty forces facing off in a final battle.  The upper bound of the triangle represents the limits of money and credit, that the world can only pay so much for the black gold that makes it run.

The lower bound of the triangle represents the price floor of the cost of retrieving oil in a post-peak world.  Below $80, for example, the shale oil and tar sands plays quickly become money-losers, where conservation will be of the forced kind -- by leaving the oil in the ground.

Steve argues that the intersection of these two lines is where TSHTF, and we can no longer afford oil we can no longer acquire.

I decided to pull up the monthly chart from and take a swing at it.

On close inspection, I actually think that Steve's triangle has already completed, that it was a sideways move in a continuing rally in crude oil.  The test, of course, will be if/when we break the triangle and keep going.

After that, I think we get in trouble again, that we experience another great deflationary contraction, i.e. crash, similar to the 2008 cycle.  That would take /CL from an approximate $130 peak down to ... $20.

Then we get the dollar failure and the hyperinflation and the cannibalism and they'll cancel the Superbowl ...

/CL monthly

What do you think of the future of oil?

Will you take the Steve Ludlum challenge?  What of his triangle?


Bicycle said...

I think he's right, the chart he recently posted applying the same triangle to the Brent WTI spread and how it might be shutting in US production is also compelling.

It's $3.70 here, $4.10 for diesel, which is high for this time of year for sure. Pulling up a regional avg retail price chart shows a similar chart pattern to /CL with the exception that there was a false break south out of the triangle and we are now stampeding higher. To me that sort of supports Steve's note in his latest post that refiners are now selling WTI outside of the midwest because of the WTI Brent spread.

It's terrifying.

Christian Gustafson said...

And there is certainly an alt scenario with the oil chart where we hit the top triangle boundary, and fail there, without the blow-off to $130.

We'll either blow through it, or it will hold and recognize the fact of deflation in a big way.