Oil prices rebounded in the 2 weeks since my previous report, with Nymex WTI crude adding about $7 per barrel and Brent about $9 per barrel.
Price charts courtesy of oil-price.net
From the perspective of suppy & demand, there was no good reason for the new surge in oil prices. I'm keeping the alarm level unchanged.
Oil Alarm Level — Yellow
Some of the rebound was compensation for overshoot to the downside, but otherwise we are left scratching our heads about the increase in prices. Let's look at various reports from last week.
Tuesday — "the economy looks a little better"
A brighter outlook for U.S. homebuilders and rising industrial production pushed the price of oil higher Tuesday for the fifth straight day.
A survey by the housing industry showed that confidence among homebuilder soared to a five-year high on the expectation that new home sales will rise this year...
Meanwhile, U.S. industrial production rose in June. The Federal Reserve said factories made more cars, machines and business equipment...
“The economy looks a little better today,” said Phil Flynn with Price Futures Group.
Tuesday — post-Benanke buying (more quantitative easing)
Oil prices rose a fifth straight session on Tuesday, after U.S. Federal Reserve Chairman Ben Bernanke left the door open for more monetary stimulus but gave no signal on whether the Fed was closer to such a move.
Investors had hoped for signs that the Fed was nearing a third round of bond purchases, also known as quantitative easing or QE3, to boost a wavering economy.
After the first of two days of congressional testimony by Bernanke sent oil prices lower, both Brent and U.S. crude bounced back, with prices supported by tensions involving Iran's dispute with the West over Tehran's nuclear program, along with recent North Sea supply interruptions.
Bernanke repeated the Fed's pledge to act if needed, even while offering no new clues on when or how the central bank might offer extra support to the U.S. economy.
"It's post-Bernanke buying because, while he was not explicit about doing something, the door is clearly open," said John Kilduff, partner at Again Capital LLC in New York.
Thursday — tensions in the Middle East
Rising tensions in the Middle East have pushed oil prices up 19 percent over the past three weeks and are leading to a rise in prices at the gasoline pump...
But in the past few weeks, those negotiations [with Iran] appeared to have failed, a U.S. Navy ship fired on a boat in the Persian Gulf and Iran said it has devised a specific plan to block oil shipments.
Then, on Wednesday, seven Israelis were killed in a suicide attack in Bulgaria. Israel blamed Iran for the attack, and vowed to strike back. Iran has denied involvement.
“It’s raised the fear quotient,” said Tom Kloza, chief oil analyst at the Oil Price Information Service. “This was more than just talk and taunting.”
If oil buyers worry that oil will soon be in short supply, they buy oil futures contracts to lock in the price as insurance against future price spikes. Those purchases drive up benchmark oil prices and can eventually lead to higher prices at the pump.
Friday — weak global demand
Oil slipped below $92 a barrel Friday, after a big jump the day before, as weak demand was weighed against rising Middle East tensions...
Analysts say Middle East tensions could cause further spikes for oil but they might not be long-lasting. The world's two biggest crude consumers — the U.S. and China — are both grappling with economic slowdowns that are crimping demand for oil. Supplies, meanwhile, are plentiful.
The recent rise in oil prices — the Nymex contract closed two weeks ago at $84.45 — was motivated not only by the higher geopolitical risks, but were also "a correction to the excessive slump" experienced in past weeks, said analysts at JBC Energy in Vienna.
"Very limited global spare capacity on the supply side combined with seasonal upticks in oil consumption ... could support further price increases," JBC said. "On the other hand, lackluster economic news appears likely to put a stop to the recent rally rather sooner than later. Overall, the current price level would fit quite well with our perception of oil market fundamentals."
I went through this little exercise to demonstrate just how corrupt (and silly) the oil markets have become. Absurd examples like these could be duplicated ad nauseum. One day X is said to cause the price to rise (or fall). The next day, or even the same day, it is Y which is said to cause the price to rise (or fall). If you wait 24 hours, you will discover that it wasn't X or Y, it was actually Z that caused the price to rise (or fall). And so on.
Of the factors X, Y and Z, not to mention P, Q, and R, which did not appear in our sample, which is the correct answer? None of the above! These are all post-hoc rationalizations reflecting the "thinking" of irrational gamblers (traders). In short, the humans are making this shit up as they go along!
The oil markets, like just about every other global market, have become unfettered gambling casinos. Traders are betting the short-term price will rise, or they're going long on oil, or they're betting prices will fall by shorting the market. In the short-term, which can last for months, these movements have nothing whatsoever to do with supply & demand fundamentals.
There was a time in the distant past, in a galaxy far, far away, when oil prices were relatively stable for years at a time. Not any more. In 2012, nobody looks askance at a 10% per barrel swing in the price of crude oil. These bozos think such movements are normal. Marketeers maintain volatility indices (VIX) so they can gamble on those too!
The hard ceiling on the crude oil supply (peak oil) is only part of the explanation. It certainly doesn't explain the crazy price swings I documented today.
What will prices be in 2 weeks? Hah! God only knows!