Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UKGC Set to Make Online Gambling Industry More Risk-Free - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Crude Oil Price Falling Off A Cliff, Like September 2008?

Commodities / Crude Oil Aug 09, 2011 - 05:24 AM GMT

By: Andrew_Butter

Commodities

Best Financial Markets Analysis ArticleI suspect that even the most sophisticated student of Econ-101 would concede that the trajectory of the price of oil in 2008 was a bubble and that 2009 was a bust?

Not that anyone has come up with a convincing theory for what it was that pumped up the bubble or what finally popped it, outside of the old favorites such as…the insanity of crowds, terrorist plots, and Goldman Sachs.


The dynamics of the price in 2011 are eerily similar to what happened then:

I have argued previously (a) the “correct” price for oil at this juncture is about $90 (b) that according to Farrell’s 2nd Law the bust will be a mirror of the over-pricing at the top of the bubble…127/90 = 1.41…so the bottom of the bust will be…90/1.41 = $64…(c) the main cause of the blowing of the bubble in 2011 was the conflict in Libya (d) the “pop” was going to happen on 30th April 2011.

http://www.marketoracle.co.uk/Article24849.html
http://www.marketoracle.co.uk/Article26603.html
http://www.marketoracle.co.uk/Article27857.html
http://www.marketoracle.co.uk/Article27982.html

Let’s see what happens next.

Reflecting on the cause of what appears, at least from the current perspective, to have been a bubble and a nascent bust, was probably a combination of the “normal” trigger of too much easy money floating around, combined with the start of the Libyan crisis, exacerbated by the practice of pricing oil on indexes.

That there was easy money, there is no question, although cause and effect was not established in 2008 and not in 2011 either. My guess for the dynamics of how Libya affected the market is as follows:

1: The start of the conflict took out a (relatively small) component of supply, but it was a special sort of ultra-light oil used mainly by European refiners.

2: Refiners can’t easily change the grade of their feedstock, so those who were set up to process Libyan oil were obliged to go to the spot market to buy, and since they were European, and Brent is light oil, that’s where they went.

3: So…supply and demand, Brent went up.

What happened next is an example of how indexes can mislead the market; three things; the first is that Brent accounts for less than 1% of all the oil pumped in the world; second, although everyone says they follow their own index (WTI, Argus etc), the reality is that everyone looks over the other guy’s shoulder.

Third, most oil (and many gas) contracts are linked to an index, so if you buy a couple of super-tankers of oil, the price you pay on delivery is a multiple of an index, with the multiple being determined by the specific quality of the oil; so if Brent goes up, that can pull up WTI and Argus, and the whole world pays more for oil.

When the Saudi’s correctly noticed that oil was a bubble starting in March 2011 and (they say) they offered up 800,000 barrels of oil a day to replace the lost Libyan oil, they couldn’t find any buyers; that’s because it was the wrong type of oil.

Why Saudi Arabia would want to play “fairy-godmother” is of course another question, a cynic might well say selling more at the top and less at the bottom, is a good strategy (it is), a less cynical view is that wild swings in price around the “correct” price doesn’t do anyone any favours except for the speculators who time the swings correctly; the fundamental Law of Bubbles is that they are zero-sum, for every winner, there has to be a loser; in sustainable economic structures, in every transaction, both sides are winners.

It’s interesting that in a period of history where governments appear to the casual observer to be peculiarly preoccupied with petty internal squabbles and lining the pockets of the players, whilst missing the Big Picture, and in between borrowing huge sums of money so they can play Rambo, the Saudi’s come across as about the only “grown-ups” around.

Perhaps it might be a good idea to give them a seat on the UN Security Council and kick out France and UK, and replace those two mini-Rambo states with a chair for the EU (err…perhaps not, if the EU was on board nothing would ever get decided)?

Equally when the oil was released from the SPR; that had little (or no) effect, because it got sold at auction, outside of the indexes, if a much smaller amount of oil had been surreptitiously leaked into the Brent market (what a naughty-naughty idea), that would have made a much bigger difference (for a lot less investment).

So short term, it looks suspiciously like the “market” lost sight of the “fundamental”, again (it’s not the first time).  

But markets will be markets; they oscillate around the equilibrium, which confusingly changes over time. $90 Brent as my guess of the equilibrium my be high if (a) economic activity in the world was affected by the price of oil (which translates into food prices, and business margins (case in point airlines)), and (b) the extraordinary spectacle of the dysfunctional US Government throwing it’s toys out of the pram (again), translates into a recession.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules