“Even if you are the only sane person in the asylum, there’s nothing you can do about” oil prices, says a leading expert. It’s crazy out there — just like NASDAQ 5000, except the whole world, including the US government, apparently believes it this time, with perhaps some very few exceptions. One of those skeptics is Oppenheimer oil analyst Fadel Gheit, via WSJ, who says that the oil market has become an insane asylum, with a $50 per barrel tulip-mania of speculation built in:

More than half or about $50 a barrel says longtime Oppenheimer & Co. oil analyst Fadel Gheit. After all, he says, world oil supply and demand has fluctuated only slightly since oil was at $60 a barrel. Signs now point to slowing demand growth, especially in developed countries, and no big supply shocks. So why would oil prices spike almost 5% in a single day, crossing the $100 mark Tuesday? And if fundamentals were the prime driver, why would it fall a few hours later?

The new rules are: There are no rules, says Mr. Gheit, a managing director and oil and gas analyst at the Wall Street brokerage, in a chat with Environmental Capital. There is a total disconnect between supply and demand and the price of oil, he says. His reasoning? Oil companies can profitably replace oil at between $15 to $20 per barrel. With the price of crude oil historically three times extraction prices, that should put oil between $45 and $60 a barrel. Any oil company that can’t replace reserves at $15 a barrel shouldn’t be in business. So anything over $45 a barrel is all fat, he says.

Lower interest rates threaten an already weak dollar, fueling a push into hedging commodities, such as oil. Bets made on future price movements can become self-fulfilling if enough trades pile in. That also leaves little room for bets in the opposite direction. It is a bull run stay out of their way. Even if you are the only sane person in the asylum, there’s nothing you can do about it, Mr. Gheit says.

When you take a look at how oil and the dollar have performed since the Fed started lowering interest rates last fall, you can see in the mirror images of the prices that Mr. Gheit may have a point. Oil prices are one way to go short the dollar in an era when the Federal Reserve has telegraphed that it will keep lowering interest rates in its turtle-like fashion, creating the safest of worlds for shorting the dollar — an almost risk free bet for the last six months or more:

We think this will all end with both a bang and a whimper, but we’ve been wrong before. Meanwhile, we recall the words of Keynes that a market can stay irrational longer than you can stay solvent. Be careful out there.

This entry was posted on Wednesday, April 9th, 2008 at 10:11 am and is filed under General, business, idiots!. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.