While I was not a finance major in college, I do know a few things about supply and demand. If there is ample supply and lower demand, prices should be low. If there is limited supply and high demand, prices should be high. I guess oil investors never really studied supply and demand economics. Black gold is higher in European trading, as investors believe that the U.S. recession may have bottomed. Such a bottom could signal rising demand, which is enough for beleaguered black gold investors. In fact, Gerard Rigby from Fuel First Consulting in Sydney, Australia, noted, "The feeling is we've seen the worst of it, and the only way now is up . . . Some of this is also a trading momentum play."
What is interesting is that crude inventories rose 600,000 barrels a week ago and stand well above inventories from the same time last year. Nevertheless, the speculation of perceived momentum is strong enough to cause investors to call a black gold rush. As to this fact, Rigby stated, "Inventories are still going up . . . We're not seeing an increase in crude demand, so there's no pressure on supply."
With inventories on tap tomorrow, it will be interesting to see the reaction in the oil patch. If there is an unexpected drop, I would suspect a rather healthy push higher. Of course, with the irrational action from oil, a surprise build in inventories could cause a similar price reaction.
With oil qualified as a momentum play, I have to issue a warning. Momentum can quickly swing in the other direction, leaving some investors with high-priced oil and low demand . . . isn't that where we are right now?
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Reader Comments (Page 1 of 1)
5-12-2009 @ 4:02PM
veyron3k3 said...
It's a corrupted system! Ever since Katrina hit, nothings has slowed oil. Even now, with inventories up and driving down, these so called "investors" will not let it go down. Speculating where or not the economy is recovering is not how its suppose to be. Oil should be a lagging indicator, not a forward indicator.
5-16-2009 @ 1:14AM
jim bunger said...
We are at peak oil, and that means we are moving from a demand-constrained market, where prices are set by the high marginal barrel cost, to a supply-constrained market, where price is set by the ability of the consumer to pay. Markets may or may not see it this way, but the only way to burst overinflated prices is to cause the market some risk in being long. For that to happen they need to see where future supply will come from, and with current policies killing investment, there is no risk in being long. Prices will increase until they kill the economy recovery, and we will go through these cycles until permanent decline sets in. We can't offset this forever, but we can mitigate the worst by increasing domestic production and tackling end-use efficiency in a serious way.