While I respect your analysis (it is reasonably well thought out) I disagree with a few points.

Here are my shots:

1) 20/20 is not market analysis. If someone besides them has information, I'd believe it, but they have a pretty sever bias about corporations and particularly oil companies. I would not trust anything they have to say unless two other non media sources corroborate it.

2) I don't disagree that oil can still go downward. I agree that OPEC cutting production 'because they need money' is crazy-talk. But the US does not use most of the world's oil. It simply uses the greatest share. The combined total of the rest of the world far surpasses what we use, so we need to add China, India and others to make a reasoned comparison which I think is to bearish. I'm bearish on the US oil, but that's not even 20% of the picture.

3) I think this is my key point... you mention emotions versus rationale. I, like you, believe the market should be more rational than emotional. I've come to realize these are not rational times. I fully expect 2010 to continue to be more emtional than rational, and if people expect oil to move upward seasonally, it will. Inventory numbers be damned - it will move upward. It's hard to look long term when short term is, well... irrational (i.e. emotional).

In short, I'd be careful betting 'down' from here. I think I may get into oil if it retraces, but there is almost no way it does not move up from, say, Feb '10 prices through mid-year. That is seasonal. That is ignoring the rational.

That is why I think you're wrong. :)

Cheers!

-Shea

Heh Stockaholic,

I did a similar calculation as you and I came away with a somewhat different point of view.

I don't disagree with that oil will eventually turn around but I don't see that happening very soon.

I did almost the same chart as you but with dollar values for both HOU and HOD. I then converted each to 100% of the total and charted them against the July peak to January.

I expected HOD $volume to stay high until the bear had run its course. It absolutely shocked me to see how the $volume made a bumpy but fairly linear transition from roughly 80/20 to 20/80. I'll send you a pic of the chart if you email me. The herd consistently ejected early from a winning trade as the price dropped? Wow!

So my first conclusion is that the herd has a significant margin of error.

So onto the overall trend.

Demand is low and dropping fast in the short term. I can't quantify that except in as much as I can read the papers and interpret the news. (I beleive this is one of my strenghs and I think I do it way better than the herd)

Consider OPEC. The herd seems to think that OPEC will succeed in cutting supply. Indeed, some suggest that OPEC has no choice because they **need** the money.

Think about that! Doesn't that make the case that those with the greatest need for cash will cheat like a drug addict?

More importantly however is the weekly inventory numbers. They pretty much tell us what demand is like. This brings me back to the herd.

I've been watching the price action on March oil (I follow HOD too but it is my secondary indicator) very closely. The herd has a sharp trigger finger on the up side on any good news (oil rigs sidelined) and seems to ignore the bad news (inventory numbers). My interpretation is that the up side is emotional and the down side is rational.

But what about Goldman Sacks? I think 20/20 did a piece on this. They manipulated the price on the way up by using storage to manipulate supply. It appears the bulls think G-Sacks will make another run up after the bottom is hit which it appears the herd feels we've arrived at. If G-Sacks pushed the price up to $147 then what is the argument that they won't push it down to $20? They stand to make as much money and more selling puts. Whaat is the argument that G-SAcks has made enough money with puts. Does the herd even realize that G-Sacks would and could make money on the way down? As well, I'm curious to know whether the oil in their storage facilities is counted in the inventory numbers. Ditto for the oil in tankers playing the contango for future delivery. As long as G-Sacks can maintain the Contango, they've got a good thing going.

Another point worth considering is the anger and vitriol on the message boards hurled against those that hold the opinion that oil will continue down.

Bottom line... (my personal opinion for those reading)

In the short term (0-6 months)I see oil vascillating between bull and bear numbers until the bulls are fatigued and the herd is milked. I'm seeing patterened up/down action and am currently playing this. (I'm profitting OK but my trading ability is less accurate than my predictions so far.) I digress... I hope I don't get slammed but I certainly don't see any change for Mar-Apr and somehow I doubt May. I won't be shocked if oil hits $25 in April or May.

In the medium term(6-12 months)... I would only only plan on riding the bull up and the bear down but I don't see why we'd hit $60 or $80 unless supply dries up.

What I (and very few I think) know, is where supply and demand will balance(investor action removed). That is anyone's guess.

In the long term (1-2 years)well... a bull is highly possible but it cannot happen in a vacuum of investor exuberence. Jobs and consumption must come along for the ride and that won't happen soon.

So... in my opinion... that matches perfectly the graph I drew out. The herd sets (in my opinion) a low average return. They come to the party too early or too late and don't know when to leave.

Eric