Precisely a year ago all the same factors we keep seeing today were cited as CNN speculated whether oil could hit the record price of $80. The consensus at that time was that $80 was unlikely:

with both the geopolitical scene and hurricane season heating up, will we see $80 oil in the next few weeks?…The recent runup – crude is now above $72 but traded in the low $60s just a month ago – is the result of heightened tensions overseas…a truce between the Nigerian government and rebels who want greater local control over oil revenue is unwinding fast…international inspectors are set to release a report any day detailing Iran’s nuclear activity, which will almost surely be followed by more tough talk, at least…

Most analysts say surging demand from developing countries and the United States, combined with a limited amount of new supplies, is the main reason why crude has gone from around $20 a barrel four years ago to over $70 today. But it’s not the only reason…It has also attracted lots of money from investors betting on crude prices, which one recent study said is adding $10 a barrel to the price…

experts are mixed as to whether crude will hit a record high this summer. “I see us getting to $75 or $77 without much problem,” said Peter Beutel, an oil analyst at Cameron Hanover, a consulting firm. But to go any higher “we would need something to happen.” Fimat’s Halff agreed. “I’m not sure we’ll see $78, but we’ll go back to $75,” he said.

When crude prices finally did top $80 in September 2007, the NYT cited the same causative factors. The Globe and Mail said this:

As oil prices surged to a record of more than $80 (U.S.) a barrel yesterday, analysts were asking just one question. Why? After all, the summer driving season is over. OPEC just opened the spigot for another 500,000 barrels a day. And, most important, the global economy is facing a credit crunch that’s threatening to slow growth and cool energy demand. These are hardly bullish fundamentals.

But try telling that to the hedge funds and other speculators who were piling into crude yesterday. On the New York Mercantile Exchange, crude oil for October delivery leaped $1.68, or 2.2 per cent, to settle at $79.91 a barrel, after touching an intraday record of $80.18…

Part of crude’s strength is good old-fashioned momentum. When an asset class starts moving higher, the lure of making a quick buck attracts more buyers, who push prices even higher, thus luring even more buyers. And commodities such as crude oil make an attractive target for speculators, particularly now that the U.S. dollar is weakening and investors are looking to park their money in hard assets, which they can easily gain exposure to by buying commodity index funds.

OPEC chimed in, via Bloomberg, saying that the “fundamentals” did not support $80 oil:

OPEC, whose members produce more than 40 percent of the world’s oil, said crude at $80 a barrel won’t last because “fundamentals” don’t support the price. “I don’t think the price will stay at $80,” Secretary General Abdalla el-Badri said today at a press conference in Vienna. “The fundamentals don’t support that.” The price of $80 a barrel is “too high,” he added. The Organization of Petroleum Exporting Countries unexpectedly agreed to increase oil production by 500,000 barrels a day…

Reuters reported: “Royal Dutch Shell Plc’s top executive said on Wednesday he sees no fundamental reason for crude oil prices to have jumped above $78 a barrel. ‘No one has to wait at the gas pumps of the world. There is no physical problem’, Shell Chief Executive Jeroen van der Veer told reporters.”

In one year oil prices have doubled to $145 or so a barrel, and there is no new news since oil prices were half that. It is perhaps noteworthy that, as the Shell executive said, there are no physical shortages of oil anywhere in the world and there never have been any such shortages. The same tired excuses of Iran and Nigeria are trotted out time and again. What is indisputable is that vast reservoirs of cash have been added to the long side of the oil futures market. (This made good sense while US interest rates were going down, but that risk-free environment no longer exists, since the Fed is done with rate cuts.)

In our view it is highly likely that the oil producers themselves have been in on the frenzy. They no doubt think that the oil futures market is the lapis philosophorum of the 21st century. (In medieval alchemy, the Philosopher’s Stone was said to turn lead into gold; today OPEC leaders turn their own hype into outrageous profits.) They produce the oil, and then, through the futures market, turn the oil into gold, magically doubling its price. So far they have been successful. However, the narrative line that is used to support the endless spiral of price rises is getting pretty long in the tooth. At some point it should cease to be plausible, possibly all of a sudden.

This entry was posted on Saturday, July 5th, 2008 at 5:17 pm and is filed under General, business. 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.