Why Are Oil Prices Rising?
Many are asking the question about oil prices: Is this deja vu all over again? Didn't we just go through a several-year run-up in prices based largely not on fundamentals, but on traders bidding them up, ultimately to $147 a barrel? Only then to see them plunge to $32 a barrel?
If one puts stock in the plunge, then there appears to be air in the run-up today to a six-month-high of $60 a barrel. How much is anyone’s guess. The other day, one exceedingly smart oil analyst privately put it in the range of $5 to $10 a barrel.
Here is the case for a price bubble: Oil inventories are at a 19-year high; the
The opposite case goes as follow: The market is factoring in expected inflation because of global deficit spending; Chinese investment spending is reviving. Over at Alaron, Phil Flynn says these are also genuine “fundamentals.”
Regardless, there always seems to be reason offered up to trust in a price run-up. After all, markets are all about emotions, as Robert Shiller notes. Yet, there are still sober voices. In my view, the Financial Times’ Chris Flood delivers it straight: Prices are rising because of various types of trading gambles. Flood quotes Mike Wittner, a senior oil analyst at Société Générale saying the following: “Recent price strength is not based on fundamentals, but on financial flows.”
Over at the Oil Drum, Rune Likvern says up to 3 million barrels a day of oil is being bought purely for storage, including on the sea. But he predicts that such purchases – which help to prop up prices – will decline because storage is becoming harder and harder to find; when they do, Likvern says, prices will fall substantially.
It’s a fool’s game to predict oil prices. That doesn’t stop a lot of people, of course, especially the traders.
Labels: $60 oil, oil prices, oil speculation, opec
1 Comments:
Steve:
There are many investors who feel that there is the potential for a fairly serious US Dollar devaluation (i.e. inflation) over the next couple of years.
Therefore, those investors would be looking for an asset class in which to "park" their capital as an inflation hedge. Oil is an excellent candidate for such an asset class.
Unlike gold, oil is much more liquid (no pun intended) and the demand for it is much more certain.
The story of the past 15 years has been one of too much capital (read: US Dollars outside the United States) chasing too few assets. The result has been asset-based bubbles (US equities, real estate, and now, perhaps, US Treasuries).
The run-up in price may be, like those other bubbles, a phenomenon based not on fundamentals but on excess liquidity.
If this is the case then oil is actually a much better asset class than are investment securities (equities, bonds, CDOs, etc.) because at the end of the day the asset itself can be used in the real economy.
We may also be witnessing a similar strategy on the part of the Chinese who are making huge commodity investment around the world and most recently in Brazil.
At the end of the day, would you rather own actual oil or US Treasuries? I think the answer is obvious and explains what's happening.
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