By Andrew Gordon
Of Course It’s the
Speculators
It’s just plain wrong that oil speculators are having no effect or
only a minor one on the price of oil.
The arguments that have hoodwinked smart people into believing that
oil prices are justified are so flawed, it makes me wonder what kind
of mass hypnosis has come over us. The main argument I’ve heard time
and again is (in its logical construct) very similar to this one...
Suppose I’m fat, and I go to Mickie D’s every evening and eat five
bacon double-cheeseburgers with five helpings of fries. My sister is
also fat but she doesn’t eat fast food. So that’s proof that pigging
out at Mickie D’s has nothing to do with my being fat. It must be
another reason and the reason is obvious: my metabolism.
And so the argument goes with the oil market. It’s feeding on tens
of billions of dollars pouring into the futures market and getting
fatter and fatter. For example, five years ago, the commodity
futures market had $13 billion invested in it. Now it has $260
billion. Eighteen years ago, only 13 percent of open interest in oil
futures was long (betting that oil prices would go up). Now, 58
percent is invested long.
But it makes no difference – so they say – and you know why? Because
other commodities like coal and cobalt that aren’t on a tradable
index are also experiencing dramatic increases in prices. And
because oil supply is tight and seemingly getting tighter.
What’s wrong with the “thinly traded commodities are also high”
argument? The same thing that is wrong with “my sister is also fat”
argument. Just maybe (do you think?) “my sister” would be even
fatter if she hung out at Mickie D’s with her brother.
As high as cobalt and rice are, does anyone doubt that if they were
traded by long-only commodity index funds or ETFs to the point that
tens of billions of dollars were pouring into the futures market and
betting long, they’d be even higher right now?
‘It has to be my metabolism instead” is the same as saying “it has
to be market fundamentals instead.” It would be silly to discount
fundamentals (as it would be silly to discount metabolism). But by
solely focusing on fundamentals (or metabolism), the feeding frenzy
is ignored. And that’s silly too.
It’s not an either-or kind of argument. In fact, the price of crude
only makes sense when you take both into consideration: lousy
fundamentals and a speculative frenzy. One pushes the price up to a
certain level and the other pushes it up higher.
Yes, it’s absolutely legit that oil prices are going up. Here are my
eight biggest reasons for crude’s price rise.
-
With a global oil shortage expected to persist into the future
and perhaps get worse, prices should be at record highs.
-
Robust global demand is causing oil prices to rise.
-
Oil has been rising on the weak dollar.
-
There’s been a slew of bad news recently – from strikes and
pipeline attacks in Nigeria to Libya threatening to reduce crude
production – which is driving up prices.
-
The oil majors are producing less not more crude.
-
The oil majors are producing more crude than they’re finding in
the ground.
-
Demand is slowing but oil production is falling faster than
demand is slipping.
-
There’s no immediate alternative to oil consumption.
But...
Should oil prices have gone over $140? And should they very possibly
be going over $150-170 in the coming weeks? No way.
Not when the high-end costs of producing oil is in the $55-70 range.
Sure, there’s been a worsening of the supply-demand equation, but
it’s been marginal. I believe the price of oil should be around
$100-110.
The reason why it has gone WAY UP is the speculative oil
bubble. Some hedge funds dove in and shorted on the fundamentals but
forgot that they were at the same time creating a speculative
monster. They weren’t just investing in the oil market. They were
becoming the market. Without that critical realization, they
underestimated the top of the market and were punished ... forced to
cover their bets ... and suffered staggering losses.
On the other hand, those who keep betting that oil prices will rise
are raking in the dough. Bad news in the oil patch may mean
worsening fundamentals. But how bad ... for how long ... is it part
of a pattern or not ... exaggerated or not ... with immediate or
long-term implications ... all the color has been bleached out
because it doesn’t really matter anymore.
