The oil bubble

For a different point-of-view on the worldwide supply of oil, go to http://www.freeenergynews.com/Directory/Theory/SustainableOil/ and read about abiotic oil. If this is true, we are no where near “Peak Oil”.

As for today’s inflated market price for oil, I’ll make it easy on myself and just post a block quote from the May 12 Newsletter on http://www.stocktiger.com.

Oil another bubble? If so how high will it go? TOL – Toll Brothers home builder stock price went from $4 in 2000 to $10 in 2002 and people started taking “Housing Bubble” and laying on shorts. By the next year TOL was $15 – added another 50% in a year and even CNBC was saying Bubble. In 2004 it hit $20 and finally in 2005 TOL peaked at $58 – yikes. Now it is back to $22. It took many years for the bubble to pop.

Now there is no housing bubble for all the speculative “hot money” to fuel so they found another one. Crude oil had a late 2001 low of $17 so has run hard for 6 years and could go some more but it has some of the same problems that the housing market did. Speculators is the big one. In housing take Miami as an example and its condominiums / apartments. As the prices kept rising, speculators jumped in to buy and ride the wave. They had no physical use for the condominium but only wanted to unload it to a higher bidder. In effect they were creating a false market as the need was not for a place to live but only for a profit.

In the crude oil market now it is similar. It is true that demand from China and India and others is rising but not nearly at the rate of the product. OPEC says there is plenty of oil in the market so they do not want to increase supply. So the demand is not for the physical oil but for the paper contract that gives you the right to trade it. Future contracts in oil in the past were used mainly by producers or real buyers to hedge their position / price to protect from the volatile swings. Now, however it is widely traded by speculators who will never take delivery of the actual oil.

As, per the radio program All things Considered, in 2000 all the funds who invest in oil spent about $8- $9 billion. Now it is over $250 billion – this adds that much demand that does not take delivery of the actual product. The California Pension System, the Central Bank of Singapore these are the type of big buyers, they are not buying to fuel a factory but to fuel a portfolio. Sure oil is also up because of the falling dollar but the there is to counter that, a 400,000 barrel-a-day reduction in physical demand from the United States, which is consuming less because of its economic slowdown. OPEC does not have to add to production as this frenzy is not demand for the actual product.

The media loves to talk of supply and demand but it is demand for contracts not product. Michael Waldron, Lehman’s oil strategist said recently about oil, “Supply is outpacing demand growth,” “Inventories have been building since the beginning of the year. We have pretty significant projects starting soon in Saudi Arabia, and large off-shore fields in Nigeria,” he said. Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010.

The long term chart trend line connecting the 2001 and 2007 lows is also at about $70 now. However – like the housing market – it is not over until it is. So while Lehman is looking to $70 or $80 Goldman Sachs is saying $200 is on the way. Maybe both will be right. Right now hot money is chasing what is moving. Investors are looking for a place to make money,” says Jim Williams, an oil economist with WTRG.com, “and the only thing that seems to be going up is the price of crude oil.”

The commitment of traders report indicates almost 30% of the open futures interest in crude oil is from speculators and traders, and not commercial hedgers.

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2 Responses to “The oil bubble”

  1. Anaconda Says:

    Demand will go up leaving demand and supply in rough balance and a soft landing for oil. Prices will stabilize.

    Oil is Mastery is a blog focussing on deepwater, deep-drilling oil exploration and production.

  2. pastamanvibration Says:

    Thanks! I added ‘Oil is Mastery’ to my blogroll. Great info there on the subject.

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