Oil easily pushed past $145 Thursday morning after traders calculated that the already weak dollar has further to fall after the European Central Bank increased a key interest rate by a quarter point to 4.25%.
Oil rose as much as $2.28 to $145.85 per barrel -- an all-time high -- before easing back slightly to trade at $144.40 at mid-day.
Oil tends to rise when the dollar falls as investors/traders seek to preserve purchasing power of the decreased value of dollar-denominated commodities by bidding their price up. However, it's important to note that the dollar/oil correlation is not perfect: there have been instances in which the dollar fell and oil fell.
The other major energy commodities also were higher Thursday at mid-day. Heating oil rose 3 cents to $4.09 per gallon, unleaded gasoline increased about 2 cents to $3.56 per gallon, and natural gas added 2 cents to $13.41 per million BTUs.
Stock slump also boosting oil
Economist Glen Langan told BloggingStocks Thursday that in addition to rising interest rates in Europe -- which historically have been bad news for the dollar -- investor leeriness regarding U.S. stocks also is pushing oil prices higher. "We have this trend which has built up for about a year or so now where institutional investors are shunning stocks and adding oil and other commodities as return-on-equity vehicles, as performance assets," Langan said. "It's the market at work and it's what you'd want a firm to do, namely maximize profits, but it's likely to elevate commodity prices for some time, which will push up inflation."
Further, Langan said the above is a more-accurate description of investment patterns "on the ground" than views that argue that 'speculators' are distorting or artificially boosting commodity prices.
"I don't know what observers mean by 'distorting' prices. Markets bid up and bid down prices, and sometimes the market gets it very wrong to the upside and it's called a bubble. What people and typical investors have to keep in mind is that if oil, for example, is experiencing a bubble, if there's little substance behind the price rise, bubbles eventually burst," Langan said. He added that there's "almost no way one can accurately predict the end of a bubble."
"I haven't seen a good study that accurately identifies which factors signal an end to a bubble. All we know is that when they occur, there's massive selling over a period of days or weeks, a series of panic sells or capitulations occur when major investors exit the asset, and supply and demand fundamentals reassert themselves," Langan said.
With the above as a guide, Langan argued that the current high oil price is a factor of the small safety cushion between global oil supply and demand, and the absence of other attractive investments, particularly an absence in U.S. stock markets, among other factors.
Conversely, a bullish stock market, Langan argued, would probably take money out of oil to the point where oil would drop "to about $90-100 per barrel," he said. Other factors -- for example, a rising dollar, an end to the Iraq War, resolution of the Iran nuclear dispute -- could take another $20-30 off oil's price. If all of the above occurred, oil would trade around $70-95, in his interpretation.
"And a $70-95 oil price would be a reasonably fair price given emerging market economic growth and oil's current large role in commercial activity," Langan said.
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Reader Comments (Page 1 of 1)
7-03-2008 @ 4:10PM
GROUCHY said...
CONGRESS VACATIONED FOR JULY 4TH THE WHOLE WEEK. DID YOU? DID YOUR BANK ACCOUNT STOP HURTING WHILE THESE INPOTENT LAWMAKERS TOOK A BREAK, VOTE THEM ALL OUT IN NOVEMBER. LET US HAVE SOME NEWBIES AS IT DOES TAKE AT LEAST A YEAR FOR THEM TO BE BOUGHT...AND MAYBE DURING THIS TIME, WE CAN GET SOME LEGISLATION THAT WILL REGULATE:BAILING OUT THIEVES IN THE SUBPRIME DEBACLE, DOMESTIC DRILLING ALLOWED, STOP THE GREEDY SPECULATOR TRADING OF A WORLD NECESSITY, CREATE VEHICLES THAT ARE ENERGY EFFICIENT AND GET THE DAMN PEACE STARTED IN THE MIDDLE EAST! TIME FOR A CHANGE FOLKS AND WE ARE THE ONLY ONES THAT CAN DO IT AT THE BALLOT BOX.>.> LEAVE YOUR PARTY HAT HOME !