Sunday, June 16, 2013

Oil 2013: The Mother Of All Bubbles

(Drivebycuriosity) - Last week we got news that the U.S. inventories for crude oil & gasoline grew again and are close to a record level (bespoke). But the oil price ignored the fundamental facts and continued its climbing tour.

Since April oil prices have been moving northwards, ignoring that U.S. inventories reached a record high, stock markets got volatile, interest rates jumped, the U.S. oil production is rising and the U.S. oil demand is shrinking. Instead the market has been focusing on the political news. According to Bloomberg and other sources the price of oil rose last week to a four-month high on Middle East tensions (bloomberg). The media claim that the civil war in Syria, massive demonstrations in Istanbul and the conflict with Iran (about their nuclear ambitions) could disrupt the global supply of oil.

This reminds me of the first half of the year 2008. Then the price of oil jumped to an all-time high of $147 even though the recession had already started. Before the year 2000 the oil price fluctuated around $40. Around the year 2003 a oil price rally had began and catapulted the energy price to a level of around $100 where it has been sticking since then (except a short lived selling panic in the second half of 2008) (wikipedia). Between the years 2003 and 2008 gas prices at U.S. pumps more than doubled and seem to be glued to $4 per gallon (gasprice).

What caused this apparently stubborn behavior? Oil is traded on financial markets like stocks and bonds. Many hedge funds and other speculators are buying oil futures, which represent the energy prices. For years they have been pumping many billions of dollars into the oil market in the hope of further price gains. Hence the oil price reflects expectations rather than the real supply and demand.

Since the early years of this century the oil prices have been agitated by continuous speculation about conflicts in or with Iran, Iraq, Libya, Syria, Egypt and other places in the unruly and politicaly fragile area that all could endanger the oil supply in the future. Many gamblers have been betting on a politically caused oil shortness and created a huge price bubble.

But, history shows that bubbles pop. That is their nature. There are already strong forces working against the oil bubble. The U.S. oil supply is rising fast thanks to new technologies like fracking and deep sea exploration ( On the other side oil demand is shrinking in many nations because people drive less, use fuel-saving cars and other energy-efficient machines (demand destruction). They also switch to alternative energy sources like natural gas, wind & solar energy. Both trends lead to an over supply which carries a growing pressure onto the price of oil. 

Therefore the oil bubble needs more and more political fear mongering to stay alive. At some point the Near East scares won`t be strong enough to overpower the fundamental forces and the bubble will implode as any bubble does.

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