Attention has shifted back to our bungling in Iraq, but not long ago the topic du jour was the price of oil.
I listened to several lame discussions of the price of oil in the media and none of them mentioned hedge funds and the impact of speculators. Maybe this kind of answer is too complex for the adoring public; much easier to blame foreigners.
Oil Settles Above $70 a Barrel, Despite Inventories at 8-Year High
April 18, 2006
Crude oil closed above $70 a barrel for the first time, highlighting a phenomenon reshaping the petroleum world: Investment flows into oil futures are supplanting nitty-gritty supply-and-demand data as prime drivers of prices.
In contrast to past bull markets in crude, this year's run-up has occurred even though oil inventories in the U.S., the world's largest market, have swelled to their highest levels in nearly eight years.
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The answer to the puzzle posed by rising prices and inventories, industry analysts say, lies not only in supply constraints such as the war in Iraq and civil unrest in Nigeria and the broad upswing in demand caused by the industrialization of China and India. Increasingly, they say, prices also are being guided by a continuing rush of investor funds into oil markets. Institutional money managers are holding between $100 billion and $120 billion in commodities investments, at least double the amount three years ago and up from $6 billion in 1999, says Barclays Capital, the securities unit of Barclays PLC.
The flow of money into oil, analysts say, has been prompted by a spreading belief that demand for oil will continue to rise with global economic activity as supply tightens under the influence of several factors -- among them, the West's escalating nuclear standoff with Iran; growing political violence in oil-rich Nigeria; and more broadly, steadily growing global economic activity. The three-year bull run in oil has been underpinned by strong global demand for fuel coupled with a prolonged shortage of spare capacity to pump and refine crude.
"What's been happening since 2004 is very high prices without record-low stocks," says Jan Stuart, global oil economist at UBS Securities. "The relationship between U.S. inventory levels and prices has been shredded, has become irrelevant."
It remains to be seen whether this belief in a paradigm shift that permanently buoys oil prices will stand the test of time. Not everyone agrees that financial flows have trumped the importance of inventories, and oil traders still anxiously await each weekly inventory report from the U.S. Energy Department.
