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The price of oil - going up? Or going down?
Posted by: McQ on Monday, April 28, 2008

Predictions are all over the place. On the "down" side:
The oil boom is on its last leg and may last a few months before a clutch of new refineries start operations amid slackening economic growth across the world, consultancy firm and investment bank Lehman Brothers has predicted in a report.

The report said supply is in fact outpacing demand growth even as inventories have been building up for quite some time now. This announcement must surely come as a huge relief for consumers reeling under high oil prices for some time now.


Lehman also trimmed its forecast for global growth from 1.5 mbpd to 1.1 mbpd, predicting a slide in prices to $83 next year and $70 to $80 in 2010 . This was very much in contrast to the five-fold increase in prices that oil has seen over the last half a decade.
However, those talking about a continuing increase in the price of oil aren't really talking about the supply and demand:
But analysts say a complex mix of factors—from low interest rates to the sagging dollar to the faltering economy—is behind the oil price hike. And they don't expect a letup any time soon.

"This [price spike] isn't an issue of supply and demand," says Joel Fingerman, principal of Chicago-based Oil Analytics, an energy consulting firm. "This is about money flow. It could stop here or at $150."
Oil has become the new hedge fund:
In other words, traders are bidding up the price of oil. It's the downside, in one sense, of the scramble by the Federal Reserve Board to rescue the financial markets in the wake of the subprime mortgage meltdown. Since October, the Fed has been consistently cutting interest rates—most recently on Mar. 18, and it's expected to do so again on Apr. 28. Each time it does so, the value of the dollar falls against other currencies. Traders react by investing in other commodities as a hedge against the falling dollar, and dollar-denominated commodities (such as oil) become more expensive.

"As long as the Fed continues to cut rates, traders will keep selling the dollar, buying the euro, and buying commodities like oil," says Peter Beutel, president of the New Canaan (Conn.)-based energy risk management firm Cameron Hanover. It also doesn't help that investors are still skittish about putting more money into stocks. "Traders are relentlessly long [on oil] because there's nowhere else to go," says Phil Flynn, an analyst and vice-president at brokerage firm Alaron Futures & Options in Chicago. "They're heading to oil and other commodities for safety."
Interestingly, politicians seem more interested in taking on what they call "the speculators" than really addressing the underlying problem - the fall of the dollar. There's no political capital to be won taking on the hard work of halting its steep descent. Instead, politicians, as usual, look at symptoms and address those with the most populist appeal. And their solution is always the same - an investigation and a public chastisement with the possibility of some sort of punitive legislation which will see money flow into government coffers while the supposed victims of this problem continue to pay the same price at the pump.

Succinctly put:
The report blamed the price spike on a $40 billion inflow into commodity index funds this year, much of it from Middle East sovereign wealth funds - the petro-investors may have second thoughts about gaining ''double exposure'' to commodity prices.

''Financial flows have been the marginal driver of prices since the onset of the credit crunch. Investors are using oil as a hedge against inflation and a falling dollar,'' the report said.

The index effect has lifted prices by $20 to $30 a barrel. This could reverse sharply once the dollar starts to stabilise against the euro, since the euro/dollar exchange has become the proxy watched by oil traders for signals, it said.
Until the dollar is stabilized and begins to regain some of its lost value, oil prices will remain high. And whatever the politicians come up with otherwise will all be for show.
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Previous Comments to this Post 

I have a sincere question, and it’s something I’ve only marginally understood:

How does currency rise/drop and what can be done to increase the weight of the dollar?
Written By: Joel C.
URL: http://
It almost makes you hope that Bernanke will see a further rate devaluation as causing more increased harm through commodity hedging and dollar depressing than benefit through liquidity. Anyone have an idea where that inflection point lies right about now?

Agreed that the politicians are completely useless in addressing this issue beyond the typical Bill Lepetomaine-esque "harrumph harrumph".
Written By: CR
URL: http://
I think the realization that there was never any recession is not far away, and our current, slow-growing economy will pick up pace later this year. The fed will begin a series of rate increases, which will strengthen the dollar. Oil, gold, and other commodities will fall. The stock market will go up, and speculators will begin shifting money. Hopefully, a new administration will get our deficit under control by spending cuts, which will aid in strengthening the dollar. Middle East instability will still cause volatility in oil prices, but they will come down off these record highs and start reacting to market forces.
Written By: Is
URL: http://
I have been saying for some time now that it will be headed down soon enough, likley by midsummer.

By way of supply and demand, the figures do not support $70/bbb much less $120. At the moment we have more crude and more distilates on hand than we have had for the last 15 years, and yet the prices continue to go up. This doesn’t speak to me of supply and demand being the biggest factor. Eventually, Supply and demand has to take over, however, this artificial high, whatever it’s cause, cannot last.

Is rasies good points, too, and I expect all of this to come about in mid-summer, barring Iran blowing up.

All that said, let’s consider ANWR.
Back in 95, when Bill Clinton vetoed the thing, he claimed the thing wouldn’t be online for ten years and so vetoed it. Well, it’s now 13 years down... and the estimates are that ANWR would add something on the order of 20% to the daily feed of oil. Suppose that would help, regardless of these other factors?

Written By: Bithead
All that said, let’s consider ANWR.
Back in 95, when Bill Clinton vetoed the thing, he claimed the thing wouldn’t be online for ten years and so vetoed it. Well, it’s now 13 years down... and the estimates are that ANWR would add something on the order of 20% to the daily feed of oil. Suppose that would help, regardless of these other factors?
Is that 20% of national oil supply or global oil supply? The price of oil is a global issue. If that was 20% national, its going to be a lot less globally. And OPEC & others might decide to offset most or all of your increase with a production decrease. Then to the end consumer it will be like nothing changes. The people with the oil rights will be the ones getting the money. Assuming they are domestically based it may help the trade deficit and perhaps the dollar in a round about way.
Written By: jpm100
URL: http://
Either way the difference would be substantial.

And you know what? Oil does not have to be that way; It can be strictly a national suppply, if we want. It’s kind of like Original sin... we have to WANNA.

As it stands, we are sitting on more crude here inside our borders, than the whole of the middle east. Make that oil available... IE; get it out of the hands of the environmental left, and get it in the hands of refners, and we can tell OPEC to rub rock salt. they’d come to US, once their biggest market dries up. Wasn’t the idea, getting us off foreign oil?

And before the enviro-whacko wing starts up on me about this, let’s examine what they’ve brought us, shall we? As a direct result of our environmentalist wing, we now have food shortages (Ethenol production) and an economy that is threatening to dive into the tank. All because they don’t like oil. Of course, they don’t like PROFIT, either, particularly where the oil companies are concerned.

I commend to your reading, a post at WND, some of which I’ll quote here:
Blame the green environmental extremists who block every effort to expand domestic energy supply, whether in offshore oil reserves, expansion of clean coal production, or the construction of new nuclear energy facilities. It’s just plain dumb to allow the shortage of readily available energy to drive prices so high that the entire economy and food supply are in jeopardy.

The fear-mongering extremists bring up the "global warming" hobgoblin every time a new initiative is introduced to increase the energy supply. Atmospheric carbon dioxide from human activity makes little or no difference to the climate.

Environmental extremists prefer to mandate the expanded use of ethanol, rather than using abundant oil supplies. This alternative produces less energy per gallon of fuel than gasoline, while driving the price of food upward, causing riots and forcing the cultivation of more land where wildlife can no longer flourish.

Environmental extremists wring their hands and cry crocodile tears at the thought of "ruining" the Alaska National Wildlife Refuge by using only 2,000 of the 18 million acres for oil production. But they seem to have no problems with the idea of covering millions of acres in the southwest with solar panels.

Environmental extremists celebrate their victory in banning DDT to save birds. But they have no problem with miles and miles of wind turbines that slaughter millions of birds every year. Nor do they seem to have any sympathy for the millions of people who have died from malaria as a direct result of the ban on DDT.

Big oil is not to blame for the high price of gasoline; the blame must fall squarely in the lap of the environmental extremists who use propaganda and fear-mongering to block the increases in the production of readily available fossil fuels. There are sufficient reserves of coal to last about 200 years. Despite Jimmy Carter’s 1970s declaration that the world would be out of oil by 2000, and considering the anticipated increase in demand, there are enough known oil reserves to last at least 60 years. This energy should be available now.
It’s time we make the enviro-whackos go sit in the corner and hug Gaia for a while, while the adults left among us save the economy.

Written By: Bithead
Oops. Forgot the link, it seems. Here it is.

Written By: Bithead
I agree with most of what you say. But I can’t get onboard with the link between ethanol and food shortages. Especially when we still pay for farmland to be mothballed. The domestic shortages at the Costco’s is from customer runs on a good and the stores rationing. They ration because you have a lot of ma & pa chinese food stores that would literally go out of business if they let some of their panicked customers buy it all up.

As for the international shortage, its the weather and fuel that get the primary blame and biofuel a passing mention when you go to the english language version of news services in places that are actually in trouble. In other words, it was unexpected.

Technically would could have been making corn for food with that same land to make up the shortfall but I don’t have any reason to believe if that land wasn’t making ethanol, it wouldn’t have been mothballed (or an equivalent piece of farmland elsewhere).
Written By: jpm100
URL: http://
. In other words, it was unexpected.
Very few catastropies are expected.
Yet, government interventions seem to ahve heir share of them, don’t they?
Technically would could have been making corn for food with that same land to make up the shortfall but I don’t have any reason to believe if that land wasn’t making ethanol, it wouldn’t have been mothballed (or an equivalent piece of farmland elsewhere).
Doubtful since the subsidies weren’t there for growing food that are their for growing fuel.

Written By: Bithead
There wouldn’t have been any market for it if the weather wasn’t bad.

The subsidies could have as easily been for the mothballing program over food or fuel.
Written By: jpm100
URL: http://
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