House of Cards

SAN FRANCISCO (MarketWatch) -- The Energy Department said crude supplies rose 1.4 million barrels for the week ended June 16. They total 347.1 million -- their highest level since the week ended May 29, 1998, the report said.

Crude oil supplies are at the highest level in 8 years, even the Saudis are cutting production because they have nowhere to put their extra inventory. The bottleneck is now at the refining capacity, if there is a bottleneck. What was the price of oil 8 years ago, May 29, 1998? $15 a barrel, and later dropped to $12 by the end of the year! See Chart

Today, the quiet experts are saying that the fundamentals for drilling crude is $50-$55 a barrel. And even the Oil Sands of Canada can stay profitable above $50. Aside from the Oil Sands, I think there's even more breathing room for oil to drop if the floor falls out. And if it does drop back to those levels, watch the UAE for some moderation in its unbridled real estate development.

This supply report helped me to understand the fundamentals behind the early signs I thought I could see. I was wondering why Chavez and his Venezualan gang were pushing a $50 floor on prices instead of the supposed $25 floor. The rest of OPEC, of course, denies that there is any price target. But as Venezuala's comments were shrugged off, even the Saudi's had some comments that displayed concern over prices becoming too low. I kept asking myself why all this bearish talk from the producers when the train is still hauling at full steam.

There is a glut of supply in crude oil. The U.S. has a glut of supply of housing, whether we'll admit it or not by looking at housing starts. It all appears to be a "house of cards", waiting for a slight wind to make it all come crashing down. When it does, I expect to see the stock markets crash with it. But, I also expect to see the large cap stocks to be the first to recover as the survivors move their money into the tried-and-true blue chips.

That's my prediction for today. The real trick is to be able to tell when it comes!