Wednesday, October 7, 2015

Economy: Oil - Speculation Replaces Reality

(Drivebycuriosity) - The world is awash in oil, but the price of the commodity is rallying anyway. For months the global oil supply is larger than the demand because a climbing production from Saudi Arabia, Iran, Iraq, Russia and other countries is overcompensating a slight decline of the US oil pumping.  This morning we learned that last week US oil inventories (crude) rose 3.1. M barrels and the gasoline inventories climbed 1.9 M barrels (seekingalpha). The week before inventories also went higher:  Crude  plus 4.0 M, gasline plus 3.3 M. Crude inventories are now 40% (137 million) above average (bespoke).

But the price of oil jumped more than 27% from its August low. The oil price rally gets fed by speculation. Ignoring the facts hedge funds and other buyers respond to rumors that Russia and Opec might talk about a possible common production reduction. Thy also speculate that OPEC will have a meeting to discuss the oil price. Further OPEC chief Abdalla Salem el-Badri claims that big cuts to oil investment are coming and the Energy Information Agency (EIA), a US public institution,  heats the speculation by predicting a climbing oil demand.

The rumors don´t make much sense. Today oil (brent crude) costs $52, about $6 more than at the low from January ($46.59). So, since January oil didn´t get any cheaper! Why should OPEC meet over the oil price now when they ignored lower prices in the recent 9 months?. And, if they manage to drive the oil price higher they would encourage US fracking to pump more oil.

These ignorance is not new. In the years 2009 through 2014 the price of oil hovered way above the productions costs (which may be close to today´s prices). The market ignored the rising oversupply and focused on  rumors and speculation on alleged production cuts in Middle East (which didn´t happen). This lead to massive speculative bubble which popped last fall. Maybe a new bubble is bloating. But it would be short lived thanks to a rising supply from Iran and a return of US oil producers.

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