Oil Price To Hit US$100; One Thing That Could Cause a Correction
“It's not a question of when we'll hit US$100 but how quickly,” Nauman Barakat tells Bloomberg. Barakat, the senior vice president of global energy futures at Macquarie Futures USA Inc. was not talking about Macquarie Bank’s share price. He was talking about oil. “There are no bearish factors in the market right now.”
None?
Well that’s bad news. When everyone is on one side of the trade…it’s pretty crowded. For the last three weeks we’ve had a completely irrational suspicion that the oil price is due for a massive correction. Our suspicion has no basis in any empirical observation. It’s just this feeling we sometimes get, like an itch between the shoulder blades.
Oil has plenty going for it. There’s a bullish supply/demand dynamic. There is the Energy Watch report that came out earlier this week (see the chart we published here). It claims the world is already at Peak Oil production. You’d think that would be bullish too.
Still, we can think of one reason the oil price would massively correct: a stock market crash followed by a nice juicy global recession. Of course we are not hoping this happens. But even rip-snorting oil bulls in full cry ought to remember that the laws of supply and demand govern all and see all.
If energy gets too expensive, the economy will cool off. It’s as simple as that. You can’t have double digit growth in China for five years running, sky-high geopolitical tensions in the Middle East, and Peak Oil. Something will have to give. We reckon it will be the oil price. However, we have no idea when that could happen.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by travelite on 26 October 2007:
The effects of a hike in oil prices are under estimate. It will really ripple through all sectors, what about tourism? Inflation is as much about perception as reality (velocity of money). Once it's out of the bag, you've lost.
Comment by MMLJ of Sydney on 26 October 2007:
Conversely, and no argument with the macro energy position globally, one should ingest a huge dollop of salt when someone like the president of energy futures at Macquarie Bank or a trader from Glencore tells Bloomberg or Reuters that the market is going to run a certain way.
Macquarie at least is a listed entity, so there may be some brakes on the spin.
But folks - the head of futures trading is running a book - and he/she wants to you place out-of-the money bets ( futures, hedges and options ).
It's like going to the race track and asking the nice bookmaker person what horse is going to win and where you shoudl bet your money.
"Oh yes, Macquarie Bank is a huge charitable institution committed to social justice and wealth distribtion, place your bets with us on number $xxx" !!
Comment by Alan on 26 October 2007:
The itch you refer to is almost certainly caused by static generated in a perfect storm, which will of course pass as these things do. However in the short to medium term the oil price will continue to be driven by the winds of geopolitical tension. Just now we should reflect on Turkey's decade long PKK insurgency, the opportunity of the moment, American F16's and logistical support (despite remonstrations by the Bush administration), Israeli/Turkish collaboration (as in the recent Syrian incursion) and the need to secure at least the northern oil fields as southern Iraq ultimately falls to Tehran. If Turkey does invade the north then it is the start of the carve up of Iraqi oil, but at least they are on our side......
Comment by Robert Rapier on 27 October 2007:
There are a couple of other bearish factors as well. The huge run-up recently, with people who have very little knowledge of oil and gas jumping into the market, is bearish in my opinion. Remember what happened with tech stocks a few years ago. Everyone was making easy money. The arguments for tech stocks to just continue rising sounded plausible. Novices were getting rich. But the underlying fundamentals weren't there. Now, I am not suggesting that the underlying fundamentals don't warrant high oil prices, but they haven't changed dramatically since summer, when oil was 30% lower.
The other thing that could be bearish is this: Consider the catalyst that set oil off and running. It was the U.S. inventory report last Wednesday. Some analysts have suggested that they suspect that there could be an error, and you could see a big gain this week. If that happens, the price could start coming back down. Remember, prior to the inventory report, the price had been drifting down.
Cheers, Robert Rapier
Comment by jim on 27 October 2007:
Of course, it's an old saw on the Street that when "there are no bearish factors in the market", you're near a top. Riseing prices are the result of ther being more buyers than sellers. When you run out of sellers that can be converted to buyers, you have reached a top...