Update
April 11, 2011: This is a very nice article on answering the question -- why is WTI oil at $111? The writer addresses the major explanations for the high price; he suggests the Fed policy of QE2 was the prime culprit, and when QE2 is withdrawn, oil is fall dramatically, as will the general market. I personally think the Saudis like what they see: a rising stock market; a global economy that is recovering, and a price that appears sustainable. A reminder: the writer, Dian Chu, has been skeptical of the recent run-up in oil prices and predicted that oil would be back to $90 by the end of April.
Original Post
It seems there is about a 50/50 split of talking heads who say oil is going to fall back precipitously and others who seem to be talking oil up to $120.
I don't know why oil keeps rising.
Here is the news that I recall in last 24 hour-news cycle. Maybe someone can tell me their thoughts why oil keeps rising.
1. Libya: US general officer says US may consider putting troops on the ground in Libya.My personal "favorites are: 3, 2, 8, 6, 1, 5 -- in that order.
2. Dollar continues to weaken.
3. More evidence of inflation around the corner.
4. Japanese energy situation is not going to improve any time soon.
5. Saudi Arabia sends emissaries to Russia and China, not US, to shore up support.
6. Increasing talk that Saudi's margin of spare capacity not all that great -- and it's the wrong kind of oil.
7. No suggestion that US is serious about own domestic oil program.
8. Evidence that global economic recovery is real; if so, huge demand for oil.
The following was not in the latest 24-hour news cycle so I could not include it, but I wonder how much of this is due to the fact that the Saudis like what they are seeing.
You didn't even consider the fact that oil speculators are just trying to drive the price up? You're talking about the price of a commodity without even mentioning the basic reasons why commodities rise and fall?
ReplyDeleteGlenn Beck had entire segment to day on the cooperation of Russia Saudi's and China.
ReplyDeleteAdd to that Japan's economy inability to recover. The only way Government has enough money to rebuild infrastructure is to print more money, thereby causing devalue of Yen. Their power industry is devastated and oil is only recourse available.
Interesting times indeed.
With regard to "speculators" and "speculating," that is the "sine qua non" of trading in commodities.
ReplyDeleteIt goes without saying that "speculating" and commodities go hand-in-hand.
"Traders" are interested in short term moves; "investors" have a longer horizon. But it's a continuum. I suppose one could say my "investment" in ATT is speculating that ATT will be good for my portfolio over time.
But I digress.
Yes, one "trades" in commodities; one does not "invest" in commodities.
I prefer to use the word "traders" -- it's less inflammatory, but if you want to use "speculators" that's fine.
So, again, it's goes without saying that "speculators" trade in commodities. But for every seller there's a buyer.
The question is why are "traders" as I call them, and "speculators" as you call them, driving up the price of oil. Obviously if we found a perfect replacement for oil (cost-free, environmentally safe, universally available, politically correct), the price of oil would drop to zero.
So, the question I have is what do the speculators see that I am missing? I have listed the obvious, but only the threat of inflation / weak dollar makes sense, but as noted above, commodities are short term trades, and inflation is tame according to the government, and we've had a weak dollar for quite some time.
Are "we" really concerned about Saudi cozying up to Russia and China? I don't know. I'm curious.
What is driving the "speculators" to drive up the price of oil?
A large number of those buying oil futures are in the line of production in the first place. This used to be called insider trading but after Enron opened up the loophole it's now common practice.
ReplyDeleteLets say you own a refinery. You buy into oil futures and then spread the rumor that you won't have as much output as you had planned driving the cost up and giving you a nice profit on both your futures and the oil you are refining. Double-win. This doesn't even take into account that other speculators will buy into it after they see you buy into it.
This is a very simplistic example but it happens all the time.
So, why wasn't that going on six months ago? What's different this time?
ReplyDeleteIn February, 2009, the price for North Dakota Sweet Oil was $19. Nineteen dollars. Now it's somewhere between $80 and $100.
What's the difference between February, 2009, when North Dakota Sweet Oil was $19, and today it's near or at $100?
I assume "your speculators owned refineries back in February, 2009. I assume they could buy into oil futures and then spread the rumor that they won't have as much output as they had planned...."
Why are the traders able to move the price of oil to $120 now when back in February, 2009, they were watching oil in free fall, below $20?
People who were short the following made lots of money.
ReplyDeleteTulips in the. Year 1624
Dow 30 in 1987
NASDAQ in 2000
Housing in 2008
And I could go on.
A herd mentality has set in. People who were long shared a belief that their investment would continue to rise. P
Is sustained 111 crude a myth?
It isn't just oil, many commodities are at highs.
I agree. I have great concerns.
ReplyDeleteJust two years ago, February, 2009, North Dakota Sweet was selling for $19. So, it's possible.
As you were composing your comment, CNBC came on with one of its regular "Breaking News/Alerts" that WTI had just hit $112.10 (a new record).
Probably not new if inflation factored in.
I think the game changer was the Japanese nuclear disaster. Nuclear energy is dead. Germany used to be an energy exporter (exported electricity to Netherlands, e.g.); Germany has shut down seven reactors, and is now going back to coal. Germany is now an energy importer.
But your point is well taken. I will put this on my Yahoo!Calendar that on April 8, 2011, folks thought WTI at $112 was a bubble comparable to the tulip mania of the 1630s.
By the way, regarding the tulip mania: Peter Garber argues that the bubble "was no more than a meaningless winter drinking game, played by a plague-ridden population that made use of the vibrant tulip market."