Oil Price Bubble?

[Queasy]

Thought this was interesting and hopefully true.

OTTAWA ? The flood of speculative investment into oil markets is inflating a price bubble that could pop and send crude prices sharply lower if U.S. petroleum demand continues to slump, analysts warned yesterday.

Crude prices continued their remarkable rally yesterday, rising 95 cents (U.S.) to close at another record high of $105.47 on the New York Mercantile Exchange.

But the boom could be setting the stage for its own undoing, many analysts argue, since it is being fuelled by speculators looking to hedge against a declining U.S. dollar and devalued financial assets. Some analysts are forecasting a sharp correction in the price of crude this spring.

?It's hard to argue that prices should be higher [now] than they were not too long ago,? said Michael Lynch, president of Strategic Energy and Economic Research Inc., of Cambridge, Mass., who has forecast that crude markets are set for a massive correction that could eventually bring prices as low as $50 a barrel.

?I think this is definitely a bubble because it is financial investors who are putting money into the market, not oil traders.?

But others argue that oil prices are heavily influenced by non-market factors, and those factors could extend the crude rally. Unlike other recent bubbles ? involving mortgage-backed securities or dot-com stocks, for example ? the oil market is often driven by geopolitical concerns, from turmoil in the Middle East to the threat of a war involving Venezuela, by weather-related shocks and by the manipulations of a powerful production cartel that is determined to defend high prices.

Oil has been on a tear since last summer, when investors began reacting to financial turmoil and economic weakness in the United States ? and the resulting decline in American dollar and interest rates ? by moving aggressively into crude oil futures markets.

Since then, crude prices have climbed nearly 50 per cent from $70 a barrel. That increase came even as analysts were reducing their forecasts of global demand growth this year, in light of growing economic weakness in the United States and elsewhere.

The stunning price rise has been driven almost exclusively by investors who were bailing out of the dollar and other financial assets and pouring into commodities, Judith Dwarkin, chief economist at Calgary-based Ross Smith Energy Group, said yesterday.

?The fundamentals don't support prices at $80, let alone $100,? Ms. Dwarkin said. She said global demand growth has slowed in recent years, while spare capacity among members of the Organization of Petroleum Exporting Countries has expanded somewhat, even as inventories of gasoline are at robust levels.

?The greater prices diverge from what is fundamentally supportable, and the longer they stay at a distance from what is fundamentally supportable, the greater the risk of a correction, and a large one.?

She has forecast an average price of $75 a barrel for this year.

Oil consumption in the developed world is dropping more sharply than anticipated just a few months ago because the subprime crisis has contributed to increasing economic weakness, Mr. Lynch said. Even emerging economies have slowed their demand growth in the face of record high prices, he added.

Prices are remaining high owing to speculation. ?It's people saying the stock market doesn't look good, real estate doesn't look good, the dollar doesn't look good, so let's buy commodities,? he said.

He said prices could drop below $50 a barrel over the next three to five years, if OPEC is unable to significantly cut production in the face of weaker demand.

But Adam Sieminski, an energy economist at Deutsche Bank AG in New York, said he is becoming increasingly skeptical of his firm's official forecast that oil will fall to $80 in the spring.

?Every one who has tried to bet against this market to the down side ? unless they are very nimble ? has lost money,? he said.

The Deutsche Bank analyst said the slowdown in demand is not severe enough to puncture the buoyant mood. At the same time, there is little spare production capacity of light sweet crude and virtually no additional refining capacity. ?The markets are horribly vulnerable to anything that goes wrong, anywhere in the system,? he said.

Should the market weaken, he added, OPEC members appear determined to cut production to defend the price at a much higher level than was previously the case.

?OPEC is getting used to higher incomes and would be more willing to defend a much higher price than what we would have thought before,? he said.

 

[meltdown75]

i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

 

[KB]

It happened to housing prices (inflated due to speculators). It could happen to Oil.

 

[Nitemare]

got to factor in a very weak dollar as well.

 

[Fritzo]

Actually I was talking about this a couple of weeks ago. What we are seeing with oil right now is exactly what happened in the early 80's. We had a bad recession back then, and oil prices went through the roof. The Asian economy is dependant on the US economy, and quickly went down the crapper. As a result, a massive glut of oil hit the market, and we had sub-$1/gal. prices for several years.

This is almost exactly what's happening today.

 

[moshquerade]

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

 

[meltdown75]

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

 

[moshquerade]

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

 

[meltdown75]

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

meh, not to worry. I'm sure I can find bloodthirsty zombie mosquitos the size of hummingbirds somewhere else.

 

[moshquerade]

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

meh, not to worry. I'm sure I can find bloodthirsty zombie mosquitos the size of hummingbirds somewhere else.

for that you could drive here.

 

[meltdown75]

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

meh, not to worry. I'm sure I can find bloodthirsty zombie mosquitos the size of hummingbirds somewhere else.

for that you could drive here.

hmm... mosquito bites i can explain...

 

[moshquerade]

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

meh, not to worry. I'm sure I can find bloodthirsty zombie mosquitos the size of hummingbirds somewhere else.

for that you could drive here.

hmm... mosquito bites i can explain...

those aren't mosquito bites!

 

[sdifox]

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

hydroponics. just be careful with the buds

 

[meltdown75]

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

meh, not to worry. I'm sure I can find bloodthirsty zombie mosquitos the size of hummingbirds somewhere else.

for that you could drive here.

hmm... mosquito bites i can explain...

those aren't mosquito bites!

epic threadjack.

 

[jandrews]

i dont really mind where it is at, sure it costs me signifigantly more but if it takes expensive gas to get people driving 14 feet long suv's in a single person family then imo its worth it.

 

[Xavier434]

I want to believe this article. I have no reason not to, but if there are good reasons why one shouldn't believe it then I would love to hear about them from other posters.

 

[moshquerade]

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75

Originally posted by: moshquerade

Originally posted by: meltdown75
i heard gas could be going up to $1.40 / L in Canada by summer

so much for that Algonquin road trip

pwnage

just do it. don't let the gas man hold you down!

heh. it's only money, right? now if my money tree would only start producing..

seriously, i'm driving to NC in April. gotta keep on living. :thumbsup:

(fyi, you *aren't* fertilizing that money tree enough if it's not producing )

meh, not to worry. I'm sure I can find bloodthirsty zombie mosquitos the size of hummingbirds somewhere else.

for that you could drive here.

hmm... mosquito bites i can explain...

those aren't mosquito bites!

epic threadjack.

as per usual. :Q

 

[BlahBlahYouToo]

interesting... so if i understand this article correctly, the reason why oil prices are increasing is because investors are driving the price up due to speculation that oil is going to continue to be in low supply, high demand? and not just solely due to it being an unrenewable resource that we are running low on?

 

[AndrewR]

Originally posted by: Fritzo
Actually I was talking about this a couple of weeks ago. What we are seeing with oil right now is exactly what happened in the early 80's. We had a bad recession back then, and oil prices went through the roof. The Asian economy is dependant on the US economy, and quickly went down the crapper. As a result, a massive glut of oil hit the market, and we had sub-$1/gal. prices for several years.

This is almost exactly what's happening today.

I hope that's true, and I hope these speculators lose their houses on their bad hedge bets.

 

[Kalvin00]

:laugh: they said the same thing about precious metals, and yet they're continuing to march up

 

[Queasy]

Originally posted by: Kalvin00
:laugh: they said the same thing about precious metals, and yet they're continuing to march up

Precious metals aren't a commodity item though. If they were, they wouldn't be precious.

 

[Casawi]

Do you guys think oil demand will actually drop to make a difference? I really don't think so, but I am not an expert.
Interesting tho.

 

[Queasy]

Originally posted by: Casawi
Do you guys think oil demand will actually drop to make a difference? I really don't think so, but I am not an expert.
Interesting tho.

Well, they cover that here in the article:

She said global demand growth has slowed in recent years, while spare capacity among members of the Organization of Petroleum Exporting Countries has expanded somewhat, even as inventories of gasoline are at robust levels.

In other words, supply is currently outstripping demand.

 

[LegendKiller]

.bombs skyrocket, then bursts. Housing skyrockets, then bursts. Oil skyrockets, then...?

I could certainly see this happening. People run from one asset to another, creating bubbles, especially these days when they are trying to bolster earnings through whatever methods they can. There's a guy I heard about at another bank that made 250MM in the last 5 years from going super long on oil.

 

[BoomerD]

Originally posted by: Kalvin00
:laugh: they said the same thing about precious metals, and yet they're continuing to march up

True, but we've been through that before as well. In the late 70's and into the early 80's, gold hit all-time highs of over $600/oz. (yes, I know it's much higher now) and the speculators were taking profits anywhere they could...for a couple of years, till the gold market crashed...back to about $300/oz.