I think we can officially say there was a sizeable speculative premium in oil, given that major troubles in one of the world's major oil-producing regions did
little to halt its fall. On the other hand, if that speculative premium was $40--the mid-to-high range of analyst estimates--then we're close to having wiped it out at this point. Don't start pricing minivans just yet.
Bear market? Not so fast.
http://tinyurl.com/5mcolz
The current phenomenon may be merely a breather in an otherwise parabolic rise.
"Don't start pricing minivans just yet."
The family minivan gets 100 seat-miles-per gallon on the highway with our family in it (25MPG x 4). 125 if you count the dog. 150+ if either of the kids brings a friend along as well.
Maybe you meant to say, "Don't start pricing airline tickets to Tokyo yet."
"On the other hand, if that speculative premium was $40--the mid-to-high range of analyst estimates"
But given that analysts couldn't even agree about whether or not there was a speculative premium at all, what faith should we put in the "mid-to-high range of estimates"? Surely those were just guesses.
Isn't it also possible that the high prices supressed demand? In the US, there has been less driving for months now. Also, China and India have revised their gasoline subsidies which would finally expose consumers in the two most populous nations to the higher price.
So the markets don't think there is going to be a war with Iran. Hmn... Let's see what happens with 362. January is still a long way off.
Not the recently reported demand destruction in China?
Funny how many pundits were lambasting members of Congress who suggested that energy prices were artificially high due to a speculative bubble.
Those on the right took it as some sort of affront to the efficacy of Free Market Capitalism (selectively forgetting Bush's buddies cornering the market on silver a few decades earlier), while those on the left criticized it for not properly jibbing with the Malthusian environmentalist paranoia they've been trying to sell for the last 30 years.
Oil is priced in dollars. The dollar has had its strongest week in five years. The US economy is still growing at a modeate pace while Europe seems to be stagnating again. The dollar has been very much undervalued in the last two years and that is starting to be corrected. The undervalued dollar created a commodity bubble of which oil is the most high profile commodity. Meanwhile, countries that do not subsidize their gas have started to make lasting changes in behavior and consumption. This combined with a return to sanity on oil exploration (remember part of the current price is the projection of future supply) has started to drop the natural price of oil. Bottomline, $140 oil was not the "end of the age of cheap oil" or a sign of the pending peak oil apocolypse but a commodity bubble driven by the falling dollar, high short term consumption and collective angst over future supplies. The bubble is bursting. I expect oil to continue to drop and within a year be back in the $70 range.
I'm with the other John above... there's more speculative bubbleness built into oil pricing than most analysts are willing to admit, and the dollar's correction will accelerate the drop in dollar-denominated oil pricing. I think it's possible we'll get even lower than $70, and sustain that level for the foreseeable future.
"Peak oil" et cetera remain hypothetical (or a fantasy, depending on your viewpoint). Sir John Templeton may be dead but his famous maxim about the four most dangerous words in investing is every bit as valid now as it was in early 2000.
Funny how many pundits were lambasting members of Congress who suggested that energy prices were artificially high due to a speculative bubble.
The lambasting had to do with not the possibility of a bubble but the idea that the oil futures trading was inherently to blame (with those evil people who 'buy and sell but never take delivery'). Also worth lambaste-worthy was the idea that passing anti-futures trading laws in the U.S. would have any appreciable effect on the world oil market.
Now, I don't understand anything about oil prices, but googling reveals that the price of oil has fallen about $0.40 today, not about $40 - can someone explain what these numbers mean?
"Funny how many pundits were lambasting members of Congress who suggested that energy prices were artificially high due to a speculative bubble."
what i thought was funny about this was that congress somehow *knew* it was a bubble. maybe it was, maybe it wasn't. at the end of the day, they played politics by searching for a scapegoat to blame for the high costs "paid by the american people".
now, prices are falling and we're left to figure out why. was it purely speculative, with no respect to fundamentals? or, was it speculative based on future world growth (betting on increasing demand from china, for example) that has gone bad? is it the result of a stronger dollar? is it b/c bush and some members of congress talked up offshore drilling an anwr? maybe it's b/c of falling us demand due to conservation efforts. it's anybody's guess why oil is falling. personally, i think it all has at least a little bit to do with it and probably a few more i can't think of right now.
the point is, congress certainly didn't know then why oil was so high and no one now can say for certain why it's fallen. there are just too many factors and too many traders to pin the cause on one thing.
"Funny how many pundits were lambasting members of Congress who suggested that energy prices were artificially high due to a speculative bubble."
what i thought was funny about this was that congress somehow *knew* it was a bubble. maybe it was, maybe it wasn't. at the end of the day, they played politics by searching for a scapegoat to blame for the high costs "paid by the american people".
now, prices are falling and we're left to figure out why. was it purely speculative, with no respect to fundamentals? or, was it speculative based on future world growth (betting on increasing demand from china, for example) that has gone bad? is it the result of a stronger dollar? is it b/c bush and some members of congress talked up offshore drilling an anwr? maybe it's b/c of falling us demand due to conservation efforts. it's anybody's guess why oil is falling. personally, i think it all has at least a little bit to do with it and probably a few more i can't think of right now.
the point is, congress certainly didn't know then why oil was so high and no one now can say for certain why it's fallen. there are just too many factors and too many traders to pin the cause on one thing.
Hmmm. The Euro can now buy 1.48 dollars as opposed to 1.50 dollars it did last week. Methinks this cannot be the cause of the fall in oil prices.
The weak dollar is because we import a lot and run deficits. That's not going to change. Okay, a recession will mean we import less and will help some, but we aren't quite there.
Hmmm. The Euro can now buy 1.48 dollars as opposed to 1.50 dollars it did last week. Methinks this cannot be the cause of the fall in oil prices.
The weak dollar is because we import a lot and run deficits. That's not going to change. Okay, a recession will mean we import less and will help some, but we aren't quite there.
I would venture that the best guess for the runup in the past year is China stockpiling it to do a temporary switchout of coal for diesel while the Olympics are going on, so as to temporarily reduce pollution.
Any other fundamentals-based explanation is hard to justify, since all the speculation about 3rd world demand surging was just as extant all the way back to at least '04, yet didn't justify $140 that far back. China's Olympic stockpiling is the one thing analysts could have reasonably not forseen.
Maybe its a bit bubbly; but I think people underestimated how hard the US would react to high gas prices. The amount of chaos 4/gal has has injected into the auto industry cannot be overstated. We're switching pretty hard to smaller cars, and if we are in/heading towards a recession, not only will our demand fall but the demand of China and other countries will drop too.
Basically, I think people thought demand was much less flexible than it turned out to be.
The Energy Information Agency's latest Short-Term Energy Outlook is due today. It will be interesting to see what it shows. Here's a couple of excerpts from last month's report:
Global Demand:
In other words: even after taking into account demand destruction in developed countries, global demand continued to grow.
Supply:
Non-OPEC Supply:
OPEC Supply:
I think we can officially say there was a sizeable speculative premium in oil
No, we can't.
Since some Dems were proposing a 10-cent hike on gas taxes when the price was over $4.00/gallon, watch them raise that projection to 30-cents, now that the price is falling. The logic being that once we've paid $4.00/gallon, that should now be the minimum we pay from here on out.......
Yes, oil prices are coming down. And, since they haven't yet hit the several-years-long trend line (30% increase per year), they may even have a little farther to fall.
On the other hand, 30% per year increase.... Definitely don't start pricing gas-guzzlers for your next transportation buy.
In any market, prices can overshoot fundamentals -- on the way up, or on the way down. If $145+ was an overreaction on the upside, perhaps oil's cyclical correction here will over-correct to the downside. In any case, I expect oil prices to be significantly higher in 5 years than they are today (though they may well be lower in 10 or 15 years), so I'm holding my oil stocks and my consider buying more during this correction.
Megan's post raises a question though, in light of her previous posts on the efficient market hypothesis. According to EMH, stocks are nearly always fairly valued, because market participants price in all information on each company constantly. So an investor shouldn't be able to find values by buying stocks the market has under-priced, or shorting stocks the market has over-priced. If Megan thinks speculators were responsible for up to $40 of the recent high price of oil, does that mean she thinks that the EMH applies to the stock market but not to the oil market?
Megan called a bubble. Someone in the oil market took time out to read her blog, and the bubble duly bust. Few people ever mark up a (presumptive) score like that.
Heady stuff for Megan. But she knows that one has to do this four times running before being anointed as a prophet.
Crazy talk. This is why I am a knee jerk redneck. The notion that economists can model a market so as to pull out the portion of the price of a commodity that is due to speculation is highly speculative.
According to EMH, stocks are nearly always fairly valued, because market participants price in all information on each company constantly.
Anyone who's ever studied stock movements knows that EMH is wrong. In the long run, markets are efficient at pricing, but day-to-day, week-to-week, month-to-month ?
Nope.
In part this is because most decisions about buying or selling aren't based on what is objectively known, it's based on what is assumed about the future - and reasonable people disagree even about what's likely to happen, and more so about what affect it will have.
Since no one that I've seen here ever gave a price range which would prove or disprove the bubble hypothesis should the numbers ever get there, no one should be congratulating themselves on spotting a bubble. Prediction before, not after.
Good science. It's what works.
Since no one that I've seen here ever gave a price range which would prove or disprove the bubble hypothesis should the numbers ever get there,
SoV, If anyone could actually make those kinds of predictions with reasonably accuracy, they'd be idiots to post it here instead of making billions in the market.
That's why I don't trust the advice of financial "experts." Anybody who's really as good as they pretend to be shouldn't need to have a day job as an "expert."
Solar Lad,
I'm not an EMH adherent, so I agree with your point about long term versus short term market prices (Benjamin Graham put it like this: "In the short run, the market is a voting machine; in the long run, it's a weighing machine"). But Megan does believe in efficient markets (at least for stocks). My question is how she reconciles that with her apparent view that the markets for oil are inefficient enough for the recent high to have included a ~$40 speculative premium.
Why no, Rob, that's not the point at all. This is the point:
Nobody here ever offered numbers back then. So it's a mugs game now; if oil drops twenty or thirty dollars a barrel, those saying there really was a commodities bubble all along will claim they were vindicated, yet those pushing the tight margins theory will say this is well within what they predicted. Cumulatively, what I've heard in the past is that if oil stays above $100/barrel, then the price was not part of a commodity bubble, and that if it drops below that magic figure, just the opposite.
Now, I'm not justifying that particular number. But it has this in it's favor: it was put out months ago. Everything going on now is just so much posturing. Unless anyone would hazard a concrete estimate?
Everything going on now is just so much posturing
Of course it is. As I said, anybody capable of more than just posturing is keeping their abilities silent, the better to profit off them.
Well, the obvious answer is that Megan doesn't believe the stock market follows the EMH perfectly in the short-term. If you look back at her posts on the topic, this should be pretty clear.
Rob, I don't think I'm being particularly obtuse here. Certain people months ago said they believed there was a commodities bubble, and so they believed that the price would drop to less than $100/barrel. Others thought that no, this was just a tight market, and that oil would never again drop below $100/barrel.
Iow, they made testable, quantitative predictions. Those people - and there are several, though not on this blog - are in the game. Other people who never gave a dollar prediction, or indeed, any differential prediction at all, are most definitely not. That includes you, Megan, and several other posters here.
Rob,
"As I said, anybody capable of more than just posturing is keeping their abilities silent, the better to profit off them."
It's possible to profit without keeping your abilities silent. See, for example, Jim Rogers.
Oil will go below $90 (2007 dollars), and probably back down to $70 (same). I wouldn't actually be surprised if it ever got back down to $30. The when . . . well, that's harder to say. But we haven't seen the bottom yet. There's too much coal in China and know-how in South Africa.
Other people who never gave a dollar prediction, or indeed, any differential prediction at all, are most definitely not.
I don't disagree. And I have never been, nor will I ever be, "in the game" on any sort of financial instrument.
I am merely offering a plausible explanation for the high poser-to-"in the game" ratio.
SoV, thanks for keeping the charlatans and scientist-wannabes in line.
Now, for my own falsifiable prediction: *if* I go long on with more than $5000, it will drop below $80 in less than a month. That's how my luck works. I used to be joking about this; I'm not anymore.
My question: if after buying the long-on-oil security, I announced the purchase, and my justification (to exploit my bad luck to bring down oil's price), and then it fell below $80, would a lot of people believe it was because of me? Would they thank me?
Just keep us up-to-date on your moves.
In keeping with what Person wrote, in the next year I will do something that will ensure that gasoline never again reaches $4/gallon:
I'm going to buy a Prius. Once I do that, gas prices will plummet. Permanently.
I also plan to help inflate everybody's housing prices by saving for a down payment. Once I do that, the next bubble will hit. All of my friends and relatives are saying "Oh, you don't need a down payment, and look what a good buy it is with the market so low! Once you buy it's guaranteed to go up!" Nope, not falling for it. I'm saving.
lol at Anti-Person and thoreau, glad to see at least one person gets the same impression.
And Anti-Person, I am expecting an informal promise of riches if I in fact do bring down oil. Not a formal, legal one, or it will destroy the effect ;-)
Wait a minute, this late-summer price decline happens every year. Prices start going up in late April, in anticipation of the "summer driving season" then start going down in late July/early August in anticipation of the end of the "summer driving season." Prices will keep going down until October when the demand for fuel oil will start increasing and prices will level out and maybe go up a little.
John, I posted your comment here.
Hmm... well at least we all agree what will happen in the long-run.. right? Pigovian times on top? Anyway - I agree that the social reaction was and is good.