A House of CardsThe markets have been messy lately. First there was the outlook revision of General Motors. On 16 March S&P changed GM's rating from BBB- stable to negative flagging a potential move to non-investment grade; Moody's followed with a downgrade to one notch above junk. The credit warning resulted in spreads widening on GM and in turn funds everwhere began selling their Emerging Market positions. Whether this was because they had margin calls to meet or because suddenly GM paying 10% looked better than getting 5% on some scary Indonesian asset doesn't really matter. The correlation of the markets was evidenced. It's a house of cards.
Next came the prediction of Goldman Sach's analyst Arjun Murti who said oil would go to $105. Is Murti being an alarmist? Actually it strikes me he may be somewhat conservative in his views. He thinks oil will his $105 by 2007 then reduce back to $30 over the following years.
This seems hardly likely if demand is increasing and production is unable to keep up. Perhaps it's actually going to $150. But why stop there? If anything, the price of oil looks set to rise until the well is dry.
On the bright side, perhaps the sun setting on the fossil fuel industry means we will not succeed in transforming the Earth's climate into one that resembles Venus.
So is it possible to hedge your oil exposure (being both a direct and indirect consumer of oil and its derivatives) by going long oil stocks? Perhaps, but it will be a rough ride. That means exposing yourself to the house of cards. You may lose out twice.