Why $120 oil is good Speculators are often blamed for artificially inflating crude prices, but some experts say high prices are needed to cut demand and develop new resources. NEW YORK (CNNMoney.com) -- With $120 oil not seeming to follow the fundamental law of supply and demand many are wondering if the market is broken. The Federal Reserve has been cutting interest rates, saving Wall Street but sinking the dollar and driving up food and fuel prices. Investors, also called "speculators" by some, have been pouring money into commodities of all sorts, artificially driving prices higher in an attempt to squeak out healthy profits in the face of falling stock values. But to many, all the financial voodoo is merely a distraction. The fundamental reality of oil - and the thing that makes it so attractive to investors in the first place - is that we are using ever more and finding ever less. High prices are necessary if we are to reduce demand, find new oil, and develop alternative technologies. http://money.cnn.com/2008/05/07/news/economy/120_oil/index.htm?source=yahoo_quote
And, as i'm sure you are aware, commodities are one of the traditional hedges against inflation and a dying currency. So the weak dollar, while tremendously helpful in monetizing the debt and giving the market the appearance of strength (or at least stronger than it would be otherwise) is really lighting a fire under inflation. The nutty way the Fed calculates inflation allows them to pretend it's not so bad. But surely the pretending has its limits. Commodity prices should moderate and than start to pullback some, once the Fed is done cutting. They will likely have to tighten some, i think, before we really see commodities start to come down in a significant way. That could be a good ways off. Wouldn't it be ironic if in spite of the Feds loose money policy we fell into a deep recession anyway? I certainly wouldn't rule that possibility out. And, just as high energy cost is not without some benefits, a recession, while unpleasant, can have a cathartic affect that brings its own rewards. Volcker taught us that. In the meantime, i expect the European central bank to be forced to lower rates before long.
New York, May 8th. Following statements from OPEC Secretary General Abdalla Salem El-Badri that "There is clearly no shortage of oil in the market"; and "Some OPEC nations are unable to find additional buyers for extra crude"; alongside data to back it up (OPEC, including Iraq, pumping over 32mn bpd; spare oil output capacity at about 3mn bpd), CAD traders seem to be reading between the lines, there is more than enough oil out there, the only shortage seems to be in the minds of energy traders hoarding futures contracts with the dizzy dreams of $150-200 bbl dancing before their eyes like the sugar plum fairies at a Christmas pageant. USD/CAD has traded up to 1.0140 again, whilst oil futures have slipped to, my goodness $122.00, cheap at half the price. A larger than expected nat gas injection (85bcf) on top of yesterday's huge 5.7mn crude build seem to imply that US energy supplies are more than sufficient. With European data revealing another sharp slump overnight despite comments from Trichet that Eurozone PMI seems to better than expected, oil prices should start to respond, if they don't there may be some serious questions asked as to who's buying and why. Overbought hourly levels now 1.0155/80.