Oil at $140/Barrel: Justified or a Bubble? 19 comments
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There is tremendous debate these days about oil prices. Some say given tight supplies and strong demand, $140 per barrel is fully justified. Others say there is a bubble in the oil markets. I am in the bubble camp.
I don't question that supply is tight and demand is strong. I also agree that there is much less slack than there used to be.
Nonetheless, the intraday volatility tells me there is much more going on than simple supply and demand considerations. Federal Reserve policy must take some of the blame for rocketing oil prices. The Fed's policies have significantly weakened the dollar, causing investors to seek ways to hedge the Fed's actions. Oil is suddenly viewed as an investable asset. This is true for a number of other commodities as well.
I recently argued in the Forbes Growth Investor that the stock market will not rally until the Fed and Treasury Department get serious about defending the dollar. I discussed this and other matters in a July 3 interview on CNBC with Peter Klein of Fifth Third Asset Management and John Ryding of RDQ Ecnomics (formerly of Bear Stearns). The segment was hosted by Michelle Caruso-Cabrera of CNBC. Steve Liesman of CNBC also took part.
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This article has 19 comments:
xmplary.blogspot.com/2...
You mean by raising rates? In THIS economy??? A very small raise (say, a quarter point) might be enough to break the back of oil ("all the way down" to, say, $110) without the rate-impact further hurting the economy, but any resulting stock market rally would be very short-lived...
Sure, the market would rally for a few days, then once everyone woke up and saw that oil was now "only" around $110/barrel (where it's STILL impossible for any transportation-related business to be profitable without big customer surcharges-- hence killing the customers' profitability, too) and the housing and auto markets were still in the toilet (gas "stabilized" at $4 ain't gonna bring back SUV sales), and now because of the higher dollar America's exports were less competitive, well, the stock market would just begin the next leg down.
The Fed is caught between a rock and a hard place, and the only thing that will solve this problem is TIME (and I mean a few YEARS, not a few MONTHS).
World food supply is the issue which will maintain the pressure on oil. Demand Destruction will not outweigh the needed energy for the increases to come in the Agricultural Arena.
Let us imagine a four day work week nationally, impossible for many industries but what the heck, the Bubble which requires Complacency continues its upward march. Americans have 3 days off rather than 2, will they stay at home all day or will they take More short distance trips?
It is too late now to prevent a Major Rise from these levels. The costs associated with production will exacerbate the prices on public vehicles which do not use oil as primary source of energy. The Transportation Sector has an even worse scenario. With the Demise of the Airlines, the trucking industry will not get much of a reprieve in their energy usage.
The Rails have fixed routes. Truck Transportation will have to increase to accomodate the deliveries previously made by air.
The only reprieve available on a Massive Scale is a Depression In the USA and Recessions worldwide.
Oil production is declining wordwide at roughly 3 million barrels annually or 3.5%. It is not being replaced.
The Dollar is declining because Oil is rising not vice versa. The higher oil goes, the greater the supply of dollars worldwide to purchase it. The greater the supply of dollars, well... the explosion of Supply will/can only drive it lower.
The FED's Charter Does Not include the Defense of the Dollar. That particular mandate is under The Treasury Department.
Meanwhile, the Fed cannot raise interest rates while the Nation is still in the middle of a Financial Crisis.
The Middle, not even close to the end, the middle which will see further attrition of assets at our Financial Insitutions who have now started selling stocks to raise needed Capital without raising eyebrows by doing so.
> jack
You are way off. Worldwide oil production is 30 billion barrels a year. Your "3 million barrels" is 1/100th of one percent of that.
I do believe the poster meant 3mmbopd a day not a year.
In any event by the year 2020 the world will consume 120mmbopd with production much less irregardless of the Petrobas and Chevron discoveries. Matt Simmons, a brilliant oil analyst for nearly 30 years, states that the Saudi's are already stretched productionwise and cannot produce 1 more barrel of oil.
We either will find an alternative to back out some of the world's oil consumption or by 2025 armed conflicts will rearrange the ownership of the dwindling oil reserves.
> jack
thesheet
Jay