When I first started the newsletter in January, one of my best stockbroker friends asked me – where do you think the price of oil is going to be at Christmas 2009? I said US$65 or $75.  Wow that’s high, he said, compared to all other analysts.

But research analysts base their oil price projections on fundamentals.  And like everything else in the market, the oil price is based on the psychology of what the fundamentals may look like 6-9 months ahead.  (Plus they are concerned about not being embarrassed on being wrong on a gutsy call that was well outside their peer group.  Iconoclastic newsletter editors aren’t burdened with that.)

I said to my friend – the market has shown it can take oil to $147 per barrel.  Then take it to $38 per barrel.  The market is powerful enough it can put the oil price wherever it wants.  All fundamentals do is show the barest of trends, which over the last 3 months has been optimism, and the market takes that and runs with it – hard. 

The inventory numbers on oil this week were higher than expected, and therefore bearish.  But over the last 3 months there have been several inventory statistics that were bearish and the market continued to take oil higher.  So I’m not convinced that was all the reason for the drop this week…

Here’s some conspiracy theory thinking for you.  US Treasury Secretary was in China trying to assure the Chinese that their vast US-denominated debt holdings were safe.  The US dollar was falling hard.  And the US dollar gold price was about to go up through the magic $1000 per ounce level.  It touched $990 this week.

The US government can talk all they want about the benefits of a strong dollar, but they really do want the US dollar to go as low as possible as fast as possible as long two things don’t happen:

• 1) The market doesn’t crash like it did last October
• 2) Gold doesn’t go through $1000 an ounce in a panic

As soon as gold goes through $1000, it is a major sign to the world’s investors that the US dollar is weak and getting weaker.  They want the dollar lower so they can pay off their debts more cheaply, and give less back to their debtors.  They inflate their way out of it.

So when gold got close to that magic $1000 per ounce, the government had to act.  To have gold go four digits while Geithner was in China would have been an even bigger embarrassment than being laughed off the stage by students at a Chinese school.

The dollar had to move higher to prevent gold from going higher.  So the dollar moved higher.  Which of course made the global oil price fall. 

Personally, I have a hard time with conspiracy theories. I’m always reminded of a conversation I had at an investment conference with Bob Moriarty, publisher of www.321energy.com.  Bob told me something like “Keith, conspiracy theories confer a much greater level of sophistication and intelligence upon the elites than is real, or even possible.  They’re just people.  I used to deliver planes to some of the richest men on earth for years, and trust me, they couldn’t figure out how to do all that .” That being whatever conspiracy theory we were talking about then.

Natural Gas – inventory numbers due out today, Thursday. The drop in rig counts is stalling now – Canada is up a bit lately and the pace of decline in the number of rigs is slowing.  Chesapeake (CHK-NYSE), the largest US natural gas producer, estimates there needs to be 1100-1200 rigs to keep national production steady.  Tristone Capital in Calgary recently estimated 1400 to increase production 5%.  The US rig count is now 700.  So by the experts, the natural gas price is setting itself up for a big jump.  As I wrote in an earlier column, I can smell the anticipation of buying in the market should natural gas inventories be much lower than expected on any given week.  Expect that to be a 15-20% jump for natural gas stocks that Thursday.

In the new and subdued US, I would suggest this equilibrium rig count number will be lower, but how much is a fool’s game. 

In my portfolio, I try to take the market out of the equation as much as possible by buying low cost producers with management teams who have proven they can grow their business, so I don’t have to pay too much attention to all the detailed noise.