Probably the most devastating personal impact if oil goes over $100 is that there won’t be a beer fund for people who stop by and see me in Aberdeen. Therefore, if you come see me you will have to pick up the tab. 🙂
But a MarketWatch story today highlighted that energy stocks were tracking oil prices, which is why I am hedged against rising oil prices:
Energy stocks rise along with oil prices
NEW YORK (MarketWatch) — Energy stocks moved up Monday along with the overall market after oil futures broke through $93 a barrel for the first time on jitters over a production cut in Mexico on bad weather. Oil futures rose $1 to $92.86 after breaking through $93 for the first time earlier in the day.
For me, that’s mixed news. On the positive side, higher oil prices mean that people will conserve more energy. That is first and foremost, the most important thing. Also, the value of my company stock increases; a good thing for me personally. On the negative side, high oil prices really endanger the economy with a recession. Furthermore, I will soon be relieved of $1,000 if the price rise doesn’t slow down. Of course, forced conservation also means hard times for some people. We must conserve, but there are certainly people suffering at these prices.
On the price issue, I continue to see many analysts reiterate what I have been saying. From the same story:
Natixis Bleichroeder Inc. on Monday said in a note to clients that oil prices above $90 a barrel may not be justified by supply data. “The oil price move to record territory has been accompanied by some geo-political issues, continued inventory draws and very aggressive buying by non-commercial speculators,” Natixis said. “That said, we are less than certain that the fourth-quarter oil market undersupply condition of roughly 1.1 million barrels a day justifies prices above $90 a barrel.”
I firmly believe that oil is overbought. The question is, will it correct before or after it relieves me of $1,000? That is going to depend largely on Wednesday. If the Fed cuts interest rates, and crude inventories drop again, I think we will see $100 oil within a week. I think there is a pretty good chance the Fed will cut rates (although I think that’s a mistake), but I don’t expect that inventories will be down again this week.
For me, the worst case scenario is that oil cracks $100, and then corrects back down to $70. That means it wipes out the beer fund, as well as my company stock value, and conservation efforts will slow.
8 thoughts on “The Positive and Negative of High Oil Prices”
Although it may not seem like it sometimes, we of the market cabal are really conspiring to screw you personally.
You probably saw A. Greenspan quoted on the WSJ energy blog, I think this is the original source:
Greenspan also said that a rise in the price of crude oil to $100 a barrel would not be all bad, as it would “break our dependence (on oil) some and we would see smaller cars.”
Some sub-prime comments there that might strike some as insensitive …
oil prices above $90 a barrel may not be justified by supply data.
Is there a way to know what the fair, fundamentals-based oil price should be, or is it all guesswork? For example, for a stock, you can always look at various valuation ratios such as price-to-earnings, price-to-sales, price-to-book-value, etc. Are there analogous valuation metrics for oil?
Re the Fed and interest rates, WSJ has an article up saying the Fed is debating between a quarter-point cut and no cut at all.
Re last week’s inventory report, you mentioned that OPIS questioned the veracity of the EIA numbers last week. As I recall, API put out similar numbers, i.e. sizable declines. Do EIA and API compile their data using similar or different methods? If the methods are different, that would reinforce EIA’s estimate. If the methods are similar, then they could both be wrong.
Is there a way to know what the fair, fundamentals-based oil price should be, or is it all guesswork?
The way I approach it, is that it is relative. How much have the fundamentals changed since August, when oil was 30% cheaper? Not all that much. Look at the inventories, look at the production rates. What has happened is that 1). The ASPO conference got a lot of people to thinking about Peak Oil; 2). More and more people went on CNBC and called for $100 oil. But if you look at the underlying factors, you would say that they didn’t warrant a 30% move. But that’s why I am not a short-term investor. Market sentiment is a part of the market.
Do EIA and API compile their data using similar or different methods?
They do use different methods, and the numbers are often in disagreement. I didn’t see the API numbers last week.
Here at EIA, we have a model that we use for internal purposes only, that looks at OECD inventories relative to “normal” and spare production capacity (upstream) to help us forecast oil prices. This model explains almost all of the recent oil price. To us, this means that the data can explain almost all of the oil price.
FYI, Last week, EIA and API put out the following numbers for crude, gasoline, and distillates, respectively:
EIA: -5.3 mb, -2.0 mb, -1.8 mb
API: -6.3 mb, -1.5 mb, -1.1 mb
(The numbers can be found by doing an advanced search for API on MarketWatch.com.)
I still don’t see evidence of oil prices wrecking the economy. I think the link between high oil prices and a recession in the early 80s has been overplayed. I think it works the other way round: a recession somewhere in the world economy takes demand off the table and causes oil prices to fall. In that sense high oil prices are symptoms of a (relatively) healthy world economy.
To us, this means that the data can explain almost all of the oil price.
Doug, check my comments in the OPIS thread. The situation hasn’t changed that much since August, when you were calling for oil prices to start falling.
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