Nomura $220 Call Is Absurd Without Saudi Black Swan

Nomura Holdings made a call today on oil prices. It made me throw up in my mouth. This kind of sensationalism is incendiary. Yes oil is going up a bit on the turmoil in the Middle East. It did touch $100usd, and might trade through it momentarily, but $220? Seriously?

In my rants on the Libya situation (see part I and part II), I covered the past spats in god’s country, when oil had a gain of 150% (1980 Iran revolution) and 100% (1990 Gulf War).  A $220 call on Oil is right in the middle there, about a 125% gain from its price around $98.

“If Libya and Algeria were to halt oil production together, prices could peak above $220 a barrel and OPEC spare capacity will be reduced to 2.1 million barrels a day, similar to levels seen during the Gulf war and when prices hit $147 in 2008.” – Nomura Holdings.

Nomura’s economic research team conflates this conflict-related spike during a downturn with the artificial bubble pricing of summer 2008. As I have said before, that’s a nicht-nicht. But Nomura is quite premature in that call, and especially in its articulation of how we get there: Libya and Algeria falling. A deeper look shows Nomura mentioning Libya and Algeria halting production as the paths to their lofty $220 call.

Remember though, Libya is a non-factor in the greater scheme, and even Nomura admits that without the Algeria sideshow, the rise in oil from Libya is at $110. The real deal, which I have written about previously, is Saudi Arabia. The fact that Nomura buries that info deep into its $220 commentary, along with the Saudi no-mention, make Nomura’s agenda in the $220 Oil call suspect.

The HiddenLevers team has modelled out this scenario as well:


But seeing as this scenario is mostly baked in, and Saudi social control is in effect, it may be a good idea to find some plays that would do well once you see Oil prices touch the $110-ish mark and head back down. I used the HiddenLevers screener to find those more quickly, using Oil as the lever to find inversely correlated investments. Two stood out, Ferro Corporation (FOE), and Huntsman Corporation (HUN).



Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.