Oil at $140/Barrel: Justified or a Bubble?

by: Vahan Janjigian, CFA

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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