Thursday, March 26, 2015

Economy: The Irrationality Of The Oil Market

(Drivebycuriosity) - The oil price is rising again. Today Brent Crude, the international traded type of oil, jumped 5%, extending the gains of the last days. Yesterday`s report that the already record high US inventories climbed another 8.17 million barrels (the US oil stocks are now 38% higher than they normally are at this time of year bespoke), were ignored as were news about the ongoing cooling of the Chinese economy, a major oil consumer. Indstead the market focused on reports about fighting in Yemen, even that this country is an unimportant oil producer and does not influence the global supply/demand balance (reuters   businessi). According to Reuters and other media the recent oil price hike is driven by speculation that the Jemen conflict could expand and possibly recduce oil poduction in the region.

This week`s oil price gains are another sign how irrational the oil market can be. Again the price of oil doesn't´ reflect the fundamentals, ignoring the growing oversupply and the expanding oil glut. Again the oil price is driven by speculation on geopolitcal situations.

This phenomen is not new. From spring 2007 through sumer 2008 the price of oil jumped from $60 to $147 - even that the US recession had already started. The oil price gain of around 130% price didn´t have anything to do with the fundamentals, instead the sharp oil rally was driven by speculation that there could be a war against Iran which could disrupt the global oil supply. From 2010 until last summer the oil price hovered above $100 - even that there was already an oil glut accumulating, thanks to the climbing US oil production. Again fundamentals were ignored and the market focused on speculation on imagine geopolitical events  (driveby). A chain of troubles like a civil war in Syria, setbacks in Iraq, attacks of Isis - even massive demonstrations in Istanbul, where is no oil -,  and the ongoing tensions with Iran stimulated hedge funds and other speculators to bet on rising oil prices.

                                               Preparing Another Collapse

Influential oil speculators - including banks and hedge fund managers - used every unrest in the near east region as a pretense to predict massive supply disruptions and higher oil prices. Those rumors were compliantly spreaded and aggrevated by Bloomberg and other media. For years speculative purchases kept the oil price way over the price which would have been justified by production costs and demand. The oil market worked like a hot air baloon which is kept flying by a continuous stream of hot air.

None of the alleged supply disruptions occured. The irrational high prices which existed from 2010 till last summer encouraged oil production and suppressed oil demand which lead to an oil glut and caused the collapse in the second half of 2014. I suppose that oil has to get cheaper to correct the imbalance of the recent years. The current wave of speculation  is again inspiring production  (Iran, Russia and other countries) and curbing demand. A new oil price collapse could be in the making.

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