Sunday, March 16, 2008
Why Oil Is Still Climbing
Green products and alternative energy usage is all the rage today. Besides, with an economic downturn dampening consumer spending, the dollar dropping to new lows, layoffs and reduced production at manufacturing plants (Chrylser is simply closing down their plant for two weeks), one would imagine that demand for oil would be lesser, thus driving the price downwards. What's happened instead, is that oil just sprinted past the $110 per barrel mark, and is still climbing, even as the dollar keeps dropping.
My Joe Sixpack sense tells me that yes, oil should be dropping. But the economists say different, and well...Reality says different, cause the price of oil has been steadily climbing and there's no sign that its going to drop, or even stop climbing, any time soon. We've been at this stage before, when Congress, and sundry special-interest groups piled on Big Oil, and accused them of price gouging and creating an artificial shortage to prop up prices. Nothing came of it, and if it happens again, nothing will come off it once more.
With all due respect to the tinfoil hat conspiracy theorists, the situation in the oil market today has nothing to do with evil capitalists. But it does have a lot to do with the evils of capitalism. For investors, there are two places to invest in - The stock market and commodities (gold, oil, agriculture, etc.). Now how, when and why prices go up and down in either of these markets should be looked at from two angles - First is the market, i.e. supply and demand and conditions on the ground, and second is the mindset of the investors and market movers.
As far as oil is concerned, the situation on the ground is that demand, or at least the rate of growth of demand, is going down, not only in the US, but also globally. It's simple logic. Consumers in the US are spending less, businesses are spending less, and so local demand is going down. Since the US is buying less, the countries who are exporting goods to the US, like China, will also face a business slowdown, thus dampening their demand for oil. Simply put, the price of oil should go down. In addition, the dollar should go up due to trade deficit rebalancing, thus making it easier to buy more oil for less, further easing the pressure on oil prices. That's the way the oil market works on a demand and supply level.
But...there's a small problem with this scenario. The stock markets and the commodity markets are linked to each other in reverse. Generally speaking on a macro level, when one goes down, the other goes up. The situation in the stock markets is that investors are looking at both short-term and long-term problems. For the short term, every day is another new crisis - Subprime writedowns, more foreclosures, Countrywide Corp, Carlyle Capital, Bear Stearns - And this list is bound to get bigger and bigger. For the long-term, there's tremendous downward pressure on the markets and the economy due to a lot of factors, including the housing downturn, irresponsible behavior by Wall Street, job losses, trade deficits, a do-nothing congress and the balooning costs of the wars in Iraq and Afghanistan. Let's just say the near future looks bleak, and the period after that terrifying. Which means that investors are looking to get out, and stay out, of the stock markets.
And they're heading straight for commodity markets, where they see an unprecedented boom. Oil, food grains, gold, dairy products - Everything is in huge demand and supply is falling behind this demand. An increasing global population is hungry for anything and everything that producers all over the world can supply. So the stock markets are in deep doo-doo, and investors have no other place to park their money other than commodities, which anyway are in for an extended bull market due to conditions on the ground. And this investor demand is what is driving the prices higher.
A recent AP report shares the comparative statistics of the stock markets and commodity investments. The S&P 500 index has fallen approximately 16 percent from its high last October, while oil futures traded on the New York Mercantile Exchange have jumped 29 percent since then. Some analysts estimate that the stampede by investment banks, hedge funds and other institutional investors into oil futures — which closed Friday at $110.21 a barrel — has lifted the price by as much as $30. The same dynamic has sent gold to record high prices near $1,000 per ounce.
Investors wanting to buy pieces of paper shouldn't have an impact on the actual price, but they do -That's the reality. Housing prices were driven up so much simply because investors pumped money into REIT's, since it was a bull market. Real estate investors brought up property left, right and center, even if it was left unattended and unoccupied. So the home buyer paid a heavy premium on top of what housing demand and supply dictated. Just think what would happen to property prices today if these investors had no other place to park their money and were still buying at the same rate. You would still need to pay a heavy premium over the value of the house.
Similary, even if suffering consumers manage to reduce oil prices a bit, the investors nullify the reduction in oil price with a tenfold increase by pumping money into oil futures. You're facing higher gas bills because rich brats on Wall Street think it's a neat idea to safely park their billions in oil and away from the stock market mayhem.
And the biggest irony of this whole mess is that the very people who are benefiting from higher oil prices - Texas oil men and government funds in the middle-east - might be investing in oil futures via hedge funds and further contributing to the price hike, which benefits them even more. From the same AP report mentioned above, "Hedge funds have "raised billions" in Gulf states such as Dubai, Holmes said, which is part of the United Arab Emirates. The UAE also boasts the largest sovereign wealth fund in the world, the Abu Dhabi Investment Authority, with an estimated $875 billion in assets. A U.S. spokesman for Dubai's government funds declined to comment on whether they invest in oil futures."
It might be interesting to find out how money the filthy rich oilmen in Texas have tucked away in oil futures....This is one of the evils of capitalism, and there's nothing anyone can do about it.
My Joe Sixpack sense tells me that yes, oil should be dropping. But the economists say different, and well...Reality says different, cause the price of oil has been steadily climbing and there's no sign that its going to drop, or even stop climbing, any time soon. We've been at this stage before, when Congress, and sundry special-interest groups piled on Big Oil, and accused them of price gouging and creating an artificial shortage to prop up prices. Nothing came of it, and if it happens again, nothing will come off it once more.
With all due respect to the tinfoil hat conspiracy theorists, the situation in the oil market today has nothing to do with evil capitalists. But it does have a lot to do with the evils of capitalism. For investors, there are two places to invest in - The stock market and commodities (gold, oil, agriculture, etc.). Now how, when and why prices go up and down in either of these markets should be looked at from two angles - First is the market, i.e. supply and demand and conditions on the ground, and second is the mindset of the investors and market movers.
As far as oil is concerned, the situation on the ground is that demand, or at least the rate of growth of demand, is going down, not only in the US, but also globally. It's simple logic. Consumers in the US are spending less, businesses are spending less, and so local demand is going down. Since the US is buying less, the countries who are exporting goods to the US, like China, will also face a business slowdown, thus dampening their demand for oil. Simply put, the price of oil should go down. In addition, the dollar should go up due to trade deficit rebalancing, thus making it easier to buy more oil for less, further easing the pressure on oil prices. That's the way the oil market works on a demand and supply level.
But...there's a small problem with this scenario. The stock markets and the commodity markets are linked to each other in reverse. Generally speaking on a macro level, when one goes down, the other goes up. The situation in the stock markets is that investors are looking at both short-term and long-term problems. For the short term, every day is another new crisis - Subprime writedowns, more foreclosures, Countrywide Corp, Carlyle Capital, Bear Stearns - And this list is bound to get bigger and bigger. For the long-term, there's tremendous downward pressure on the markets and the economy due to a lot of factors, including the housing downturn, irresponsible behavior by Wall Street, job losses, trade deficits, a do-nothing congress and the balooning costs of the wars in Iraq and Afghanistan. Let's just say the near future looks bleak, and the period after that terrifying. Which means that investors are looking to get out, and stay out, of the stock markets.
And they're heading straight for commodity markets, where they see an unprecedented boom. Oil, food grains, gold, dairy products - Everything is in huge demand and supply is falling behind this demand. An increasing global population is hungry for anything and everything that producers all over the world can supply. So the stock markets are in deep doo-doo, and investors have no other place to park their money other than commodities, which anyway are in for an extended bull market due to conditions on the ground. And this investor demand is what is driving the prices higher.
A recent AP report shares the comparative statistics of the stock markets and commodity investments. The S&P 500 index has fallen approximately 16 percent from its high last October, while oil futures traded on the New York Mercantile Exchange have jumped 29 percent since then. Some analysts estimate that the stampede by investment banks, hedge funds and other institutional investors into oil futures — which closed Friday at $110.21 a barrel — has lifted the price by as much as $30. The same dynamic has sent gold to record high prices near $1,000 per ounce.
Investors wanting to buy pieces of paper shouldn't have an impact on the actual price, but they do -That's the reality. Housing prices were driven up so much simply because investors pumped money into REIT's, since it was a bull market. Real estate investors brought up property left, right and center, even if it was left unattended and unoccupied. So the home buyer paid a heavy premium on top of what housing demand and supply dictated. Just think what would happen to property prices today if these investors had no other place to park their money and were still buying at the same rate. You would still need to pay a heavy premium over the value of the house.
Similary, even if suffering consumers manage to reduce oil prices a bit, the investors nullify the reduction in oil price with a tenfold increase by pumping money into oil futures. You're facing higher gas bills because rich brats on Wall Street think it's a neat idea to safely park their billions in oil and away from the stock market mayhem.
And the biggest irony of this whole mess is that the very people who are benefiting from higher oil prices - Texas oil men and government funds in the middle-east - might be investing in oil futures via hedge funds and further contributing to the price hike, which benefits them even more. From the same AP report mentioned above, "Hedge funds have "raised billions" in Gulf states such as Dubai, Holmes said, which is part of the United Arab Emirates. The UAE also boasts the largest sovereign wealth fund in the world, the Abu Dhabi Investment Authority, with an estimated $875 billion in assets. A U.S. spokesman for Dubai's government funds declined to comment on whether they invest in oil futures."
It might be interesting to find out how money the filthy rich oilmen in Texas have tucked away in oil futures....This is one of the evils of capitalism, and there's nothing anyone can do about it.
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