In recent months I have come to a new appreciation of how much oil supports the systems that define life as we know it. Despite its importance, the price of oil (and gasoline) continues to be a mystery.
It strikes me that investors, not consumers, are probably at the root of the increase in oil prices so naturally I enjoy articles that raise that very question. Considering the way investors have speculated on the price of housing, I dont see why the same thing couldn't have happened in other asset categories, even though it hasnt happened in the past.
Oil's Price Drop Reignites Debate On Turning Point
Single-Digit or $100 Barrels? The Answer Probably Depends On Impact of Investment Flows
August 21, 2006
A nearly 8% decline in crude-oil prices in the past two weeks, and the market's flirtation Friday with prices below $70 a barrel, is reigniting a debate: Is there an oil-price bubble, and could it burst?Underlying the question is an argument about what has been a bigger factor buoying oil prices in the first place: record investor inflows into commodities or supply-and-demand fundamentals.
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Crude-oil futures contracts for near-month settlement on the New York Mercantile Exchange surged more than 33% over nearly six months, hitting $76.98 a barrel on Aug. 7 before falling to a two-month low Thursday of $70.06. After an intraday low of $69.60 Friday, near-month crude-oil prices bounced back to settle at $71.14 a barrel on news of a storm developing in the Gulf of Mexico.
As prices soared earlier in the summer, oil analysts and economists argued that global economic growth, tight refining capacity to process crude oil into usable products like gasoline, and geopolitical tensions could push crude beyond $80 a barrel, even as oil inventories remained high in the U.S.
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Some increasingly vocal bears are making stark forecasts. Sanford C. Bernstein & Co. energy analyst Ben Dell is calling for $50 crude in early 2007. Philip Verleger, an independent energy economist who heads PK Verleger LLC, predicts in an interview that oil could hit the single digits in the next three years.
In particular, they say, the market hasn't fully grasped the import of investment flows into oil futures and the danger that a slowdown in those investments could cause a lull or even a panic in the oil markets. Institutional money managers have $100 billion to $120 billion in commodities, at least double the amount three years ago and up from $6 billion in 1999, says Barclays Capital, the securities unit of Barclays PLC. Mr. Dell estimates such investors have $40 billion invested in crude alone.
"Too much money has been chasing too few commodities futures," Mr. Verleger argues. He says that as long as economic growth continues, oil could climb as high as $100 a barrel in the fourth quarter of 2007. If the economy slows and demand for petroleum eases, investors will scramble for the exits. "There is no floor. The price could fall to single digits. It won't stay there for very long, but it could fall."
Mr. Verleger's dramatic forecast isn't shared by most analysts. Still, the impact of investment flows into commodities has taken some in the oil establishment off guard. As oil prices steadily rose to triple their levels three year ago, ministers from the Organization of Petroleum Exporting Countries, oil-company executives and others have periodically argued that the fundamentals of supply and demand didn't justify the increase.
