Ok, so here's where my brain bends when it comes to oil prices and what's driving the spike. In a market that's driven primarily by supply and demand -- particularly a massive global market, like the one for oil -- I don't think it's crazy to expect relatively orderly price movements. Sure prices can move up or move down, and do either drastically, but if it's really supply and demand driving it either way, I'd expect to see those changes be spread over a period of time.
By contrast, in a market driven by some sort of speculative force, drastic price swings would be expected as speculators anxiously try to read the tea leaves and capture the maximum profit before pulling their parachute right at the top.
Now look at the price action of oil just over the past couple days. Have supply and demand conditions really changed that much to warrant such a big swing in price? And how about the price action of the past year, has supply and demand really diverged that much to cause (roughly) a doubling in price? (Judging by the statistics from BP I don't think so...)
I'd love to get readers opinions on this, so feel free to chime in the comment section below or send me an email and let me know what you think.
In the meantime, I'm about to crack open the review edition of Profit From the Peak that Wiley & Sons was nice enough to send over to me and see if that has the answers I'm looking for. I will be sure to let you all know what I think when I finish.
-AvgJoe
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2 comments:
I've added a link (trackback) to your post from Media Bias: Offshore Drilling Wouldn't Lower Gas Prices for Ten Years
Matt:
To answer your question - well you seem to have already done so - S/D have not changed that much... it is the speculation that has changed. While the economist suggests we not 'blame the speculators' (http://www.economist.com/opinion/displayStory.cfm?source=most_read&story_id=11670357), I still find myself disagreeing.
One line in the article "But they do so based on their expectations of future trends in supply and demand, not on whims." is frankly not true. Often speculator 'expectations' may be 'educated whims' - that are wrong. The index funds and the smarter players make a move and everyone else who knows nothing follows - typical herd mentallity.
For example:
1. "On January 17, 2006 crude oil for February delivery rose by USD 2.38 (3.7%) to USD 66.30 a barrel. This was the highest increase since early October 2005." (http://en.wikipedia.org/wiki/Oil_price_increases_of_2004-2006)
2. This jump was a futures market response to the Nigerian violence... in which a temporary 250,000 barrels per day was not produced from Nigeria.
3. According to the 'profit fromthe peak' front flap (I'm seriously considering this book), oil consumption is 86m barrels a day. 250,000 is not even 1 percent of that.. its like .3% - however oil prices rose 3%. less than .5% is barely a drop in the bucket, but the price raise was hardly warranted. It was speculation.
Peace out..
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