Fri 9 May 2008
With oil on everyone’s mind these days (and since Jason breached the topic), I’ve had one question nagging at me. Everyone seems to think that oil and gas have nowhere to go but up. If that assumption holds, then why wouldn’t everyone just buy all the oil futures they can, hold them and become rich? Or to put it another way, why doesn’t the supposedly efficient market just spike price all the way to $200-300/barrel if that is really where we are all but destined to go. Why the steady daily grind up? It’s the basic contrarian question: if everybody thinks it’s going up, doesn’t that put it into question that it’s going to happen?
Like all speculative bulls, they have to go through the motions. Rarely does a market have an instantaneous bubble rise. It takes time. But I can’t help but wonder if the minute everyone thinks it can’t ever come down that it will. If oil were destined to go up until it is replaced, then there really isn’t any point in even wasting one second investing anywhere else, is there?
May 9th, 2008 at 11:02 pm
I would disagree with the “Everyone” part of the statement… at least in theory.
There are still a few who think the current price is unsustainable, among them those who believe a global recession will lower the demand for oil. Likewise, there are plenty of hedgers in the market (companies who actually produce or hold oil) who are selling future production at today’s high prices.
That said, if everyone really is on one side of the trade (oil can only go up), then the trend is likely about to change direction — everyone who would buy for investment or speculation has already bought in anticipation of higher prices tomorrow. Again, this is theory — let’s think about the other buyers at tomorrow’s price.
Those who invest their savings from their paycheck every month may have more money to invest in oil tomorrow, and this can cause continuing demand even if everyone is already on board. Likewise, I’m sure some people who have dividend income from other assets may choose to invest their available cash in oil when the cash is available — tomorrow.
Oil has two different supply/demand curves — one for speculators (and investors), one for actual users and producers. Traditionally users (those of us who drive cars, etc.) and producers need a supply of oil or gasoline at various points in time. I might think the cost of gas is going up over the next few months, but it is rather difficult to buy enough gas today to drive for 6 to 12 months… likewise, the oil producer might like to sell all their oil on one specific date, but unfortunately, the darn stuff doesn’t just jump out of the ground all at once.
So, mix the investor demand with the actual usage and production. Even if everyone has bought all their investment oil today, the poor guy filling his tank at the local gas station still needs gas tomorrow and next week. That can cause a continued demand over time, even if there is no additional speculative buying…
To finish with yet another idea (or two)… price discovery is a process and usually not an event.
There are also political interests at stake for an orderly change in prices — whether it is the price of oil, the exchange rate for the dollar, or the headline stock market numbers.
May 9th, 2008 at 11:07 pm
And let me lob a cliche on top of the rest of my ramblings…
Markets climb a wall of worry and slide down a slope of hope.
May 12th, 2008 at 11:17 pm
Here’s an interesting view on the topic…
Basically, OPEC might benefit the most from an erratic oil price… one that is unpredictable and makes alternative energy investment difficult… Now that’s a conspiracy theory with teeth.