On my latest trip to Amsterdam this week I saw 19 oil tankers parked off the coast in the North Sea (ironically next to a Dutch offshore wind farm). These tankers are being used for floating storage due to the glut of oil in the market. Despite this, oil prices have been on a steady climb. Oil passed $66 today – despite a global recession and all of that oil parked offshore. The Wall Street Journal thinks we are headed back to $75:
Oil prices aren’t rising because demand is recovering or because record-setting oil inventories are being burned off. Rather, Mr. Horsnell says, the market believes OPEC is coordinated enough to defend a price floor, presumably through acting together and keeping production in check. Add in a growing belief that the economy could be regaining its footing and oil prices will climb to the price that OPEC is willing and able to defend.
Some say this is all due to speculators. If the reason cited above is correct, then I guess speculation is a good way to describe the recent price rise. There is an expectation that OPEC will maintain discipline and push prices back above $70, which is what OPEC hopes for. Further, if the economy recovers, demand will recover somewhat, further supporting higher prices. Those expectations are being priced in, hence the price rise.
I just hope oil prices don’t make another swift run to $150. In the long run, I do favor higher oil prices because it incentivizes conservation of oil, but if prices change too quickly we are going to find ourselves in The Long Recession.