Thursday, May 22, 2008

A (Short Term) Bubble in Oil?

Let's look at a few opinions I've heard over the last couple of days:

  • Chuck Butler at the Daily Pfennig believes at least 20% of the current price is speculation driven

  • T. Boone Pickens (video posted yesterday) says demand is 87 million barrels per day, while the world can only produce 85 million of barrels per day - something has to give, and that's the price, he says

What does everyone think? Does anyone have the onions to short oil right now? Or is that like shorting Yahoo in 1998?


JustinC said...

This is a pdf which shows why there is a bubble in oil and, possibly, some other commodities. I'm not sure if this would make a huge difference to, for example, the price of corn but I think it could.

Globalization is an odd beast, everybody gaining from everybody else in one way or another and us speculating on it.

SugarHigh said...

Thanks for the post, Justin.

I've read that long-only ETFs, such as DBA, are skewing the grain markets, because they never take delivery, just keep rolling the contracts.

Here's what I'm having trouble with - doesn't someone eventually have to take delivery of these contracts? I don't understand how you can have a true bubble in that situation that would last very long.

JustinC said...

sugarhigh I thought the speculators could roll the contracts over? They would buy an August contract, make money on it, selling at a profit in July, then buying a December contract which they'd sell in November for a March contract.

Someone at the end has to take the delivery, but would it be Walmart because they need the corn to put in their food or would it be a speculator who thinks he will be able to store it and get more for the corn next year? Or maybe store it as fuel to be used when ever it's needed. If you think the cost of the commodity will rise over the next 5 or ten years and other assets, such as stocks or property may not, then you'll go for the 'sure thing' I guess.

There's 3 billion extra consumers and the Chinese love to shop. Well, people love to shop, when they have some money above subsistence levels. And stocks have been regularly going up for decades, although there was the period between 1995 and 2003 which was unusual.

I've got a bit in all - I can see commodities being classed as an asset, just as property and stocks are. If the consensus is commodities look cheap then more money will flow there until they look expensive. Then money will flow out into stocks or property. I've got stocks and funds that are commodity, property and neither/both related. It was telling how when the food riots started the grains index took a beating, like it's being manipulated until it causes trouble. If it was a true supply/demand relationship the prices would have continued to rise, but instead they stopped rising when they caused trouble. That's an odd, thought provoking outcome.

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