The oil price is heading down to the level where I thought it should be all along—below $70/barrel.
The oil leak in the Gulf, which poses a threat to future production there, should have caused the price of oil to go up, but a few paragraphs in the Wall Street Journal's latest report on oil futures tells the story.
Big swings in the oil market are often driven by speculative investors, as opposed to oil producers and refiners, who go to the futures market continuously to regularly lock in prices. As the dollar weakened versus the euro following the Federal Reserve's unprecedented measures during the 2008 financial crisis, these investors gravitated toward globally traded oil futures. While oil prices over the course of 2009 more than doubled in dollar terms, the rally was much more muted when viewed through the euro's prism.
The commodity-currency trade is now unraveling. The euro on Friday hit its lowest point against the dollar since October 2008.
There you have it. Regarding future price changes, keep your eye on China.
May 12 (Bloomberg) -- China’s accelerating inflation and surging house prices are adding pressure on policy makers to raise interest rates and allow yuan gains even as their concerns over Europe’s debt woes persist.
Property prices rose at a record pace in April, consumer prices climbed at the fastest rate in 18 months and new lending exceeded the forecasts of all 24 economists surveyed, figures showed yesterday...
“There is an overheating of the economy,” Nouriel Roubini, professor of economics at New York University, said on Bloomberg Television today. “China should be tightening monetary policy, increasing interest rates and let its currency appreciate over time. They are too slow, they are not doing it fast enough.”Defying Crackdown
The 12.8 percent jump in property prices in 70 cities was the biggest since data began in 2005, defying a government crackdown on speculation that intensified last month.
Producer prices jumped 6.8 percent, the fastest pace in 19 months, while consumer prices climbed 2.8 percent, up from 2.4 percent in March. New lending of 774 billion yuan ($113 billion) was more than any of 24 economists estimated. Retail sales growth accelerated to 18.5 percent in April from a year earlier...
If China does tighten, as they should to unwind the bubbles they're blowing before they collapse, the oil price will fall further—perhaps much further. However, governments throwing a Big Party are not known for cutting people off and sending them home. It didn't happen during our Housing Bubble, and I doubt it will happen in China. So we'll likely have to wait for these bubbles to blow up in their own sweet time. I expect this to happen in the 3rd or 4th quarters of this year.
Back to the Journal—
Despite the steep drop already, there continues to be a significant number of speculative long positions, or bets that prices will rise, by investors who expect a turnaround in prices. If these investors turn bearish, further declines are certain.
If you expect a (sharp) turnaround in prices at this point, you should probably have your head examined. When the longs leave the market, the price will take another dive. At which point OPEC will make some cuts to (attempt to) maintain a floor under the price.
- Prognosis for the Euro: Grim (near parity with the dollar)
- Prognosis for the Global Economy: Anemic or no growth until China blows up, then Grim
- Oil Price: Look for oil to fall to the mid-$60s (and then perhaps much lower) before it hits $85/barrel again