Oil price may go up, it may go down – but it is not in a bubble.
The macroeconomics group members did not need the help of Stockhouse moderator SH_Arber to facilitate the topic of the next discussion – they did just fine on their own.
Whether or not oil – and commodities in general – are in some kind of a bubble is a question on all investors’ and traders’ minds these days. Prognosticators both pro and amateur are coming down on different sides of the debate with research to back up their theses – except on Stockhouse.
Here, within this vibrant and outspoken online community of commodity bulls, the consensus is unanimous: Oil prices are NOT in a bubble. Read on to find out the thinking behind this conclusion as members define their terms and then present their cases for high oil prices from here on out.
As a sidebar, readers are encouraged to check out the article Speculation not driving commodity price rise, by liverless, who wrote on the same subject for Stockhouse on June 2nd.
Please add your comments at the bottom of the page, and enjoy!
[Editor’s note: Posts have been edited for punctuation, spelling, grammar and length.]
littleguy123: Something we have all touched on to one degree or another is the impact of commodities on the global economy, in an inflationary environment, compounded with strains on supplies.
The question/issue I want to put forth is a two-parter: Is crude oil in a bubble, and if "yes" to that question, are all commodities currently part of a "bubble"?
I won't ask a question and immediately jump in with my own position, so let's hear from others (and then I can counter-attack - lol).
arnoldj: Is crude oil in a bubble? Put me in the camp that says, “No.”
With the recent announcements from Russia and Mexico, and knowing from following the work of Matt Simmons (I recommend Twilight in the Desert) that Gharwar, Cantarell, and Burgan just to name a few [oil fields] are now in decline, as are the Norwegian fields and most of the North Sea (England now a net oil importer), supply for oil seems certainly at the moment capped.
Work by Daniel Yergin (CERA) is predicated on modeled production capacity and overestimates actual production of these fields. (Check out The Oil Drum blog. If you thought gold bugs were over the edge, oil bug haven, major oil geek stuff and some pretty sharp folks on that blog. Best one out there for oil but difficult to follow if you're not already up to speed on many of the supply issues and terminology.)
Moreover, add several billion consumers as Asia industrializes and demand has only one way to progress. No doubt there is a speculative element, as with any other asset, e.g. stocks, but the price channel for oil is, as Dennis Gartman likes to say, from the bottom left to the upper right.
Boone Pickens was recently quoted – yes I know he was short at year end, but to his credit reversed those positions – as saying the oil equation is really quite simple. We (the world) consume 87 million barrels a day but only produce 85 million barrels a day.
Oil is the easiest topic of all to close out, almost as easy as concluding outcomes from trillions in U.S. unfunded liabilities as the arguments against them are so limited.
Those that claim production declines are the result of technological depreciation just have to look at well pressurization data. Those that claim new fields will be found need to be specific and point out exactly where they are and stop theorizing that one day they will be found.
Petrobras has a major find off the Brazilian coast but it will add, they estimate, 800,000 barrels a day at production, but only in about 10 years. By then, the supply gap will have widened such that 800,000 will be a (pardon the pun) drop in the barrel. There hasn't been a large oil field discovered in 30 years. The oil sands are too logistically laborious to provide the solution as well as being environmentally catastrophic. Eric Sprott is a firm believer as well in Peak Oil and has written on www.sprott.com some great pieces.
One final statistic that gives insight to the direction of oil. Among OECD nations, the typical household has 2.5 cars per person. As of last year, China had 23 people per car.
gabrielgray: Is oil in a bubble? My take is, no – not as I define a bubble.
I would call it an overheated market, with excesses fueled by an influx of speculative "fast money." Even pension funds are actually investing in commodity indexes, and that kind of money is likely going to short-circuit itself. A lot of the fast money is taking profits and washing out just now, but I don't expect to see oil return to $80. Supply and demand are simply too tight.
In a true bubble, price and utility are completely out of reasonable conjunction. Google "Kuwait souk al Manakh" for a recent example of a true bubble.
I think the "Peak Oil" debate is kind of irrelevant, because it's not necessary for worldwide oil output to peak, plateau and decline to see oil prices skyrocket higher. It's only necessary for global demand to continue to increase faster than global production. It's that simple.
Everything happens at the margins. So, as the demand curve grows steeper, it inevitably must cross over the supply curve, at which point somebody doesn't get their jiggle juice.
If you think I'm crabby when I don't get my coffee in the morning, you should see the guy in Kinshasa who gets to the head of the gas line to find the pumps are empty. Yow.
When demand is 99% of supply, that's not too good. When supply is 99% of demand, put on full battle gear before you leave for work. That one per cent undersupply will drive the price toward Pluto as consumers, industries and war machines fight over the last drops in the hose.
Anyway, that's how I feel about it today. Check back with me tomorrow. I gotta run, but I'll be back.
StilesBC: No, oil is not in a bubble. If it were, there would be constant rising supplies.
If oil were in a bubble, the producers of it would know before any of us, and they would be hedging forward their future production by selling futures contracts. They're not. This tells us that the people who have oil think that prices will be going higher.
I'm sure every government around the world and CNBC and George Soros would all like oil to be in a bubble. High prices are an inconvenience to them. Hence the phrase “oil bubble” is being thrown around literally every 30 seconds for the last three weeks. They're all trying everything in their power to jawbone prices lower.
The dotcoms were in a bubble because a rising number of dotcom equity shares coincided with parabolic prices. Real estate was in a bubble, because the supply of homes was rising faster than even the prices. If oil is in a bubble, show me the supply.
frontline_jason: I agree fully with Matt on this one. The lack of a supply-side response has been non-existent despite an over ten-fold increase in crude prices.
A similar story seems to be playing out in other commodity markets. Specifically, contract iron ore prices continue to go through the roof because there just isn't enough available to satisfy everyone. In the agriculture sector, farmers are trying to boost crop yields, but little has been done so far (globally) to increase acreage on a grand scale. Also, when you strip out the effect of the tanking greenback, commodity prices in many other currencies have yet to break their old inflation-adjusted highs. The U.S. is just suffering relatively more because it deserves to via its structural deficiencies.
An interesting tidbit about the commodity complex that makes it unique relative to other asset classes is positively skewed returns. In other words, shocks in the commodity typically drive prices higher because most of the time there is a supply interruption or shortage. Compare this with the stock and debt markets, where negative surprises are the most common.
The investment implication is that commodity bull markets (eventually bubbles, should they develop) will have a higher likelihood of lasting for longer (in terms of time and magnitude) than stock bubbles. Retail participation thus far has been limited even with the advent of new commodity ETFs and ETNs.
Finally, a heuristic for your entertainment: Anytime Bozo the Clown on CNBC is calling for a bubble it means exactly the opposite (and vice-versa).
This group discussion was conducted with members of the Stockhouse community.
Next: On and off throughout the discussion members turned to the subject of the dire condition of the housing market in the U.S. and indeed, around the world. The next installment of the macroeconomics group pulls together a few of their observations and insights.
Archive
Investor groups launch with macroeconomics discussion
Inflation and money supply, part I: Treasuries crowd bonds
Inflation and money supply, part II: Buyer’s remorse
Inflation and money supply, part III: Indeflationists unite
Inflation and money supply, part IV: Measuring money
Inflation and money supply, part V: Derivative “Death Star”
Spin-offs
Inflation debate stirs investors
