Recently, there have been a number of articles in the local newspapers about
crude oil prices. While these may be interesting read for the uninformed but like
the so many in the news wire, they however are mere echos of market comments.
You don't see good analysis of the market except fundamental commentaries and
repeatition of economists' views and recommendations.

Nothing so far as I have seen that tells you anything going on inside the minds of
those whose business is crude oil, crude oil and crude oil. Nothing that tells you
what might possibly drive them to do more or less of what they are doing with
crude oil.

So far, you have not had any other perspectives from them, have you? No. Why?
For the simple reason that editors and the people in charge are not inclined to
anything other than fundamental analysis. Have you ever seen any technical
analysis in newspapers? Probably not, except maybe Malaysia and Hong Kong.

Now I will ask you a very fundamental question. If the margin (selling price minus
production cost) is high, will the business be attractive to you? If so and you are in
the business, what will you do? Produce more or produce less? I think produce
more, right? So what will you be doing? Buy more of the raw materials and produce
more of the end-products, right?

What if your end-products are Unleaded Gasoline and Heating Oil and your raw
material is Crude Oil? Any difference? From a business point of view no difference,
right? If this describe you then you are a oil refiner and your factory is the oil-refinery.
Of course Unlead Gasoline and Heating Oil are not the only end-products. There
are kerosene, polystyrene foam that go into packaging (those white color light
weight stuff you see when you unpack your TVs, stereos, printers, etc.)


Crack Spread

This is the most popular technical indicator in the energy market. This indicator has
been in use for many years, at the very least, as long as energy futures have been
traded on the New York Mercantile Exchange. This spread is akin to the Crush Spread in the Soybean Complex.

It tells you the margin; what the oil-refiners possibly stand to gain from their oil-refinery
business. As of last Friday, this spread says that for every barrel of Crude Oil at
US$58.09 per barrel, the oil-refiners' margin (not including other costs) is US$37.09
per barrel.

If you are a oil-refiner, will you do more or less of the business. Will you hasten or
will you take your time? Whatever your decision, what is the likely total impact
(caused by the decisions of you and your fellow oil-refiners) on Crude Oil demand
and supply?

Study the chart below. You are unlikely to see this in the newspaper. But this is
the beauty of it. You stand to know that bit more than them.

I cannot remember whether it was last year or early this year that economist from
a very well world US-based financial institution came out with a report that Crude
Oil would reach USD100/barrel. It was so familiiar to the time more than 25 years
ago when in similar market scenario (when Gold was trading around USD800/oz)
that economist predicted Gold would reach USD1,600/oz. All of us know what
happen to Gold after that. So this came as no surprise at all.

I kind of had a strong feeling the economist who predicted USD1000 oil would be
proven wrong by the market. I came from the school of hard knocks that taught
me that history will repeat. Because human emotional weakness will repeat and
repeat and repeat.

In the same vane, when another well-known US finacial institution came out out
with report in early June this year that the stock market decline then was the first
salvo of a bigger decline, I too had a strong feeling they would be proven wrong
by the market.

The Singapore property bubble was not to be spared too. In 1996, a colleague was
lamenting that home prices was so high and would rise further that she had to
help buy an apartment (and must be a private property, not HDB) for her brother
who was still in Secondary school. Her reasoning was that by the time he could
start work, home prices would be beyond his reach. I told her prices would crash
and his brother would be able to buy his home cheaper than the then prevailing
prices. I told her history would repeat. The signs were already on the wall. Queues
for new project launches had formed several days earlier. The queue position
changed hands for tens of thousand S$. Yes, queue position, not the actual
property. Employers were getting their foreign workers to stand in the queue.
But alas, as usual, when the mind is already fixed and the door to its reasoning
shut, nothing sensible can get in anymore.

Such is the working of our mind, such is the weakness that human emotion will
always cloud our judgement. All we need do to judge when the end of a move is
near is to just observe human emotion like this.

Crude oil... at this stage, it doesn't look possible for USD100 oil. So all those panic
that ensure after the USD100 oil prediction, all those reaction, all those decisions,
we can now see how silly they were.

And I will tell you this will be repeated in the future, in another instrument,
another commodity. You will see the same human emotional weakness in the
prediction, in the panic, in the decisions. You can bet it will repeat.