Evidence of a bubble — or just lunacy
Saudi Arabia is apparently going to put more oil on the market, and at discount prices. This WSJ piece says that the increased supply and reduced price could actually cause oil prices to spike even further, in this time of shrinking demand:
The world’s largest oil supplier does have two blunt weapons in its arsenal if it wants to try to beat down soaring oil prices to assuage the growing outcry over pump prices in world capitals. It can open its spigots wider to put more crude on the market, and it can sharply discount that crude to get refineries to lap it up. Industry insiders say that Saudi Arabia may employ exactly that double whammy in a bid to take the steam out of a market that has sent prices up more than 40% since the start of the year…
The question is whether even a temporary surge of discounted Saudi oil would be enough to reverse the most bullish oil market in decades. And if so, would the price remain lower for long? Some industry analysts say that such a strategy, if it is employed, might not have a lasting effect and could even risk pushing prices higher if Saudi Arabia doesn’t find willing customers for the additional oil at a time when demand is beginning to erode…
One thing that nearly all sides agree on: the market is not now hankering for additional oil. Saudi officials have insisted loudly for months, most recently on Friday, that more oil was not the answer. Instead, they have blamed soaring prices on the falling dollar, U.S. interest-rate policy and the increasing involvement of big investment funds in the commodities market. Saudi Oil Minister Ali Naimi said Friday that soaring prices were “unjustified by the fundamentals” of supply and demand.
When the law of supply and demand gets rewritten so that increased supply and reduced demand still means higher prices, watch out. If that is not evidence of a bubble, it is surely evidence of some form of derangement.
UPDATE — The FT adds: “oil traders now expect Saudi Arabia to announce a substantial increase in supplies when oil ministers meet in Jeddah on Sunday, although the announcement could come beforehand. This has significantly upped the stakes of the hastily called summit, making it more likely prices will rise from current levels if Saudi Arabia’s actions fail to match expectations.” Aha. Until just recently, no one was expecting the Saudis to do or say anything about increasing oil production. But now the goalposts have been moved. Now, if they say x but the traders want to hear y, prices will spike on that. No bubble here, however. Move along now.
June 15th, 2008 at 5:09 pm
When the law of supply and demand gets rewritten so that increased supply and reduced demand still means higher prices, watch out. If that is not evidence of a bubble, it is surely evidence of some form of derangement.
Are those industry analysts perchance employed by Wall Street institutions that create commodity index funds and evade regulation and transparency? Are they the same analysts who recently predicted $300 oil? Do they sit in offices vacated by analysts who said that NASDAQ was the buy of a lifetime when it ‘corrected’ to 4000?
**************
What are the Saudis up to? Maybe they indeed want to prevent a worldwide recession that would hurt their business. Maybe they expect the price bubble to pop on its own and are positioning themselves to take the credit. Maybe they even worry that America might tap its own supplies.