Analysts Puzzled over Oil Prices

I have said many times that I think that oil prices have gotten ahead of themselves. Yes, supply is tight, and I figured $100 oil next year was a good bet as supply further tightened, but the recent run-up looks like it is due for a pullback. A story in USA Today quotes analysts who feel the same:

Oil’s record has analysts puzzled

The price of oil again set a record Tuesday, easily blowing through the previous high earlier this month, in a move some analysts said was absurd because there was no solid, supply-and-demand reason for it.

“Very overdone,” commented Mark Vitner, senior economist at Wachovia.

“Fundamental reasons? I don’t see any,” said James Williams, economist at WTRG Economics.

Hitting $100 a barrel either could erase a psychological barrier to even higher prices, or it could trigger a been-there, done-that mentality. “You know, ‘Now we’ve hit $100 and we’re done with that,’ and prices drop back $20 or $30 to something more consistent with supply and demand,” Williams said.

I can see them dropping back to the $80’s in the short-term, before climbing again next year. But these oil prices continue to defy gravity.

15 thoughts on “Analysts Puzzled over Oil Prices”

  1. I personally have no direct opinion on daily prices. I have an opinion on general trends, but not on any particular price on a day.

    OPEC have been blaming all and sundry while saying the fundamentals don’t justify the price. Yet refinery buyers are paying these prices to ship crude in. And they are paying them every day.

    Speculators, so derided by OPEC, operate both on the upside and downside, often simultaneously. They just make the market more efficient. I don’t think it is all down to them. I also discount all the other so called premiums in the market such as worries over Turkeys operations in Northern Iraq. Prices are sensitive to actual changes in volumes available. If MEND shuts in 200k barrels in Nigeria, the price ticks up and vice versa. It is a whole heap more complicated than that of course, but my own view is that when you have a product with zero short term elasticity prices are extremely sensitive to even small changes in supply.

  2. “Fundamental reasons? I don’t see any,” said James Williams, economist at WTRG Economics.

    How about “people keep buying it”? That fundamental enough for ya?

  3. Speaking of speculation, what do we know about its sources? Do we know anything about the geographic location of the folks going long? Do we know anything about lot sizes – is the guy on the street starting to jump in?

  4. I hate it when I make it half-way through a paragraph, thinking “yeah, yeah” only to get hit with the big cartoon hammer.

    In the following, it’s the “reduce demand” part that had my “yeah.” It was the “we have other things to get us down the road” that was the cartoon hammer:

    Oil suppliers could be shooting themselves in the foot in allowing prices to rise so much. ‘At this price, you can guarantee there will be energy legislation in the U.S. that reduces the demand for oil,’ Williams said. ‘At these prices, other (types of energy) make sense. We can get things other than petroleum that will drive us down the road.’

    Unfortunately no, we don’t have other things. If you want to decrease demand you have to decrease miles, or increase efficiency. End of story.

  5. I can see them dropping back to the $80’s in the short-term, before climbing again next year. But these oil prices continue to defy gravity.

    Not in US dollars, sorry. Yen taking the escalator now.

  6. I agree that right now, before the winter heating season begins in earnest, oil shouldn’t be any higher than $90, but this analyst says that $20 or $30 is more consistent with supply and demand? What planet is he living on? Or does he expect China and India and a few other countries to shut down their economies so we can have cheap oil?

  7. ….this analyst says that $20 or $30 is more consistent with supply and demand?

    He said dropping back $20 or 30, not dropping back to $20 or 30. In other words, touch $100 then drop back to $70 or 80.

  8. Ah yes, I hurriedly misread that. Thanks for pointing that out. Still, I can’t imagine prices dropping as much as $30 without some significant demand destruction.

  9. No puzzle. Oil-producing nations continue to raise prices as the value of the dollar (in which their product is denominated) continues to fall. If the dollar is worth less, then they will demand more of them for each barrel.

    Today the Fed dumped $37 billion into the market (FOMC feed). As long as this inflationary behavior continues in order to bail out Citibank, et al., the price of oil (and other commodities) will continue to rise.

    If you were buying oil with gold, there wouldn’t be any price inflation, but all we’ve got is the full faith and credit of our government.

  10. There is a now classic investment saying:

    “The markets can stay irrational far longer than you can stay solvent.”

    Also, a psychologist or a true scientist (as opposed to an economist would say):

    Markets just are.

    They are not rational or irrational.

    The theoretical purified models which often bear no resemblance to actual reality, they can be irrational 🙂

  11. Well, demand is abating. Check out recent four week averages in US for gasoline consumption, Minutely down, year over year. A new annual fleets are higher MPG than average. So, we will see continual small declines in demand in US for a long, long time.
    World fossil crude demand this year will likely be flat. And down in 2008.
    Shaping up: Thug Oil vs. Peak Demand.
    World supplies are reduced not because of geology but who owns the oil. Thug states.
    In free economies, demand is being mitigated by price.
    I disagree with Odograph. Alternatives are beoming real. Sure, it may take a few years. But once we shift away from fossil oil, it could mark a permanent shift. At these prices, I predict we have seen Peak Demand. Forever.
    Check out the 1980s if you don’t buy that. Demand only recovered in the 1980s when oil became cheap again.
    So, from this point on, we have Peak Demand, or lower prices. You can’t have higher prices and rising demand. Demand for oil is inelastic, but only for a few years. we have braoched that point.
    Going out five to 10 years, we may see gluts again, if–some thug states return to the fold, ala Libya, and, for a while Russia. Who knows, maybe in 10 years Iran and Iraq will be playing MTV and inviting Silicon Valley jetsetters into their economies. I doubt it, but anything can happen.
    — or If PHEVs become prevalant.
    Even the Peak Oil crowd doesn’t seem to have a grasp of the situation. They say we will hit a peak of 100 mbd someday soon. That is a whopping 15 mbd higher than today’s production, while demand is falling. That is a glut, a huge glut.
    One thing that could continue to hold up oil price is even more thuggism in oil states.
    Don’t bet against that. Venezuela and Mexico are inches away from full-on Thug Grand Central. Nigeria? Angoloa? Russia? Former SU states? Iran? Iraq? It could get worse and worse, as elites suck in rising oil revenues, and live on it, but do not develop fields.
    In the end, I bet on Peak Demand and Western-style economies and cultures to win. Innovation with a mix of capitalism and free speech are the smartest ideas ever embraced.
    The Thug States labor under the oil curse, bankrupt in intellectual capital. They will sink. Despite oil wealth, life is worse today all over the Mideast than 20 years ago. Where are the huge farms, the world-class universities, the think tanks, the venture funds? Nowhere.
    Do not worry too much about fossil oil.

  12. “I disagree with Odograph. Alternatives are beoming real.”

    To be clear, I scoff at alternate transportation energy sources.

    Efficiency rules at this point. PHEVs may be real at some point, but unfortunately that point is not now.

    (Happy Thankgiving to all. My mountain bike ride was a success, and now all turkey will be guilt free … necessary in fact … with a 3000ft climb planned for Saturday.)

  13. Heh, as I press “publish” I wonder if that post was contradictory ;-). Yes, turkey is a viable fossil fuel alternative … for those with bikes and the ‘safe routes to work/school’ to use them.

    Bikes are an efficiency argument as well though.

  14. “Despite oil wealth, life is worse today all over the Mideast than 20 years ago.”

    I don’t think you could say that about Qatar, the UAE, or Oman.

  15. Today the Fed dumped $37 billion into the market

    These numbers are grossly misreported. These Fed injections are temporary, lasting for one day to a few weeks. As a result they are always maturing, and the Fed must roll them over. Wednesday’s $37b injection was almost entirely offset by 34.25b of maturities.

    You will often see the press report a massive injection of liquidity when, in fact, they injected less than the amount maturing that day. In such cases the Fed is actually draining reserves, but the press gets it wrong every time.

    This list of recent Federal Reserve Temporary Open Market Operations also shows maturities so you can see what’s really happening.

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