Oil going to $200 or $25 a barrel?
Posted on 06 June 2009 with no comments from readers
It is worrying for oil producers when the Russian President Dimitri Medvedev talks of $150 oil because it is so reminiscent of the $250 a barrel forecast last summer. A little hubris often comes before a fall.
Oil got down to $33 a barrel last December. Could another fall be on the cards this autumn?
Two things drive the oil market: speculation and fundamentals. It has been the speculators who have taken over the market since December and ramped oil prices back up despite the fundamentals of the worse recession since the Second World War.
Inflation
It is almost as though government bailout and stimulus money has been redirected back into the oil markets to cause this primary inflation. Well, it certainly could be that cheap money from the Fed has been put to good use gambling on rising oil prices.
The problem surely is that this surge in oil prices is self-defeating. Let us not forget that it was the spike in oil prices to $147 last July that preceded the collapse in financial markets last autumn. Oil prices and recessions have long been close associates.
As oil prices rise that places an additional cost burden on industry, transportation and consumers. And the impact is huge. The recent oil price rises could well have entirely offset all the global bailouts and stimulus packages since last autumn.
Indeed, surely here we can see the cause of the next down leg in this Great Recession. Oil prices are a tax on the global economy that it can not afford to bare, and demand will tumble as a result.
Horrific impact
British Airways has warned of a ‘fight for survival’ because of higher fuel prices on top of a global slump, energy prices will also go up for consumers already saving more and so they will spend even less and industry will struggle to pass on the additional cost, hitting profits.
Are higher oil prices therefore unsustainable in the short term? Will speculators then rush for the exit and drive prices down even below levels seen last December?
It certainly seems possible, even likely. For oil producers then only compensation is that this false recovery shows just how well prices are going to perform one day when a real recovery arrives as it must in due course.
no Comments posted by readers:
At FT Alphaville we’ve heard from industry sources that as much as 135m barrels of stored petroleum products are being stored at sea over the current cycle. To compare, the current crude inventory stock in the US amounts to some 364m barrels. That’s a lot of floating oil to cash in on.
It was not high oil prices that caused this great recession. The start of the recession was officially dated to December 2007 when these price were less than $100 a barrel. A strong world economy can take $100 a barrel. The causes of this recession are excess liquidity and lax regulations. We have accustomed to blame many things on the oil price which has been victimized by speculators.
Let’s not forget the argument about speculators pushing the price of oil futures up last summer. We could see some position covering as we continue into a volatile trading season.
Predictably, the price of oil per barrel has doubled this spring to $70 as we swing into summer. Like last year many are wondering what effect futures speculators are having on the price. My opinion is that we won’t reach last summer’s highs but we will see oil go higher, maybe $90/barrel? This time there may be a more gradual decline with prices not reaching last winter’s lows again as inflation kicks in this fall. Then again, with everyone expecting oil to continue upwards we could see a stall early on in the season with a quick pullback to $35/barrel.
I think you will see $25 and $250 oil as the cycles get further and further apart. Look at all the projects that were canceled when oil went sub $40 because they were just not profitable. It takes a long time to get these projects ramped up again. So as demand comes back a bit I think you will see another spike maybe into the mid $100 range before demand falls off again and we repeat the cycle. The easy oil is getting very scarce and the majority of oil left just can not be economically extracted under the $60-80 range (think oil sands and shale). So I think over time you will see higher highs and higher lows as the cycle progresses.
Oil is only higher due t oa very weak dollar and hedge against inflation…could run ti 80-85 but that is when I go short with DTO
I may even go short at 77-78 and hold
too early to say…GS is the great manipulator and you have to go with them for short term