The Bare Knuckled Pundit
Grand Inquisitor
You’ve heard it on television and read about it in the paper. Experts predict gas will be $4 a gallon by Memorial Day. Now there are reports that it may pass $5 a gallon this summer and reach $7 by 2010.
On the crude side, the market breached the psychological barrier de jour of $129 a barrel today. Having fallen back after briefly breaching $100 on January 2, it has since rallied and not closed below a C-note since the end of February. Fearfully, based on historical market data, there is speculation oil's blistering rally may not abate till it reaches the $140 range. Even more ominously, adding anxiety to recent analyses projecting $200 barrels by 2010, word has come from within OPEC (the Organization of Petroleum Exporting Countries) that they see the possibility of $250 barrels earlier than that.
Amidst all this dizzying and frightening speculation, the petroleum-pummeled masses can be heard screaming, “What the hell’s going on?!”
First and foremost is the value of the dollar. Simple economics; as the dollar looses value it takes more of them to buy a given product. In this case a crucial and highly sought product; oil. Accordingly, with every rate decrease that the Federal Reserve "blesses" us with, the resulting decline of the dollar against foreign currencies will drive up the price of oil and its derivatives. Chief among them, gas.
Next there is simple economics lesson number two; supply and demand. As demand for a product increases, the price of that product will likewise increase unless supply rises to meet demand. In this case, while demand in America was fundamentally flat last year, it continues to roar ahead in India, China and within the OPEC states themselves.
OPEC currently produces 4 out of every 10 barrels of oil consumed daily around the globe. Part of the problem is in addition to not increasing their production, they are siphoning off increasing amounts of oil to fuel their own economies and societies. Accordingly, they are withholding crude from the global marketplace even as demand continues to grow. Exacerbating this already precarious situation, production and exports have actually decreased among key non-OPEC producers such as Russia and Mexico.
Finally, there is the psychology of self-fulfilling prophecies.
The oil market is inhabited by a jittery, nervous and easily spooked lot. They are susceptible to suggestion, rumor and superstition. Herd-mentality is the hallmark of their mindset. They are in a word, lemmings.
When an expert or industry-related official makes a statement regarding future supply and demand and prices, the herd takes that as a sign of things to come. Their language is analyzed for any hidden meanings or underlying messages. They listen closely to hear if Paul is indeed dead. Often they interpret new reports or statements by key players as conventional marketwide wisdom. They are viewed as institutional approval to test the higher limits of the psychological price threshold. Case in point; look at how the market reacted to the release of a Goldman Sachs report projecting the price of oil in the $150 to $200 a barrel range within the next six to twenty-four months.
Magnifying the often arcane interpretations are the very real influences of human and market fear and pessimism. We, and the markets, focus on the negatives around us. They rush to the forefront of our consciousness; they dominate the news. Remember, if it bleeds, it leads.
An unsubstantiated report of an attack on Nigerian oil facilities may result in a price uptick of over a dollar. Follow that up with OPEC's repeated rejections of calls for increased production and prophecies of $200 barrels, then throw in increasing tensions between the United States and Iran and you have a highly combustible mixture of fact, fear and speculation that can result in dramatic price increases in a relatively short time frame. Watch how quickly the markets react should Israel and Hezbollah lock horns again this summer and get back to me later, if you like.
There is also an egotistical element that should not be discounted. The profitability of energy firms and analysts are directly tied to their reputations for accuracy and insight. Leading the pack with “groundbreaking” analyses gets their names in news stories and their faces on cable news.
The more they feed the media beast, the more coverage they get. The more coverage they get, the greater their reputation becomes. The greater their reputation, the more clients they attract and the higher the fees they command. It can quickly become a vicious and dangerously self-propagating cycle. In the midst of it, the markets are mesmerized and driven north by the torrent of negative information being recycled over and over again. The result; higher oil prices which leads to higher gas prices. The self-fulfilling prophecy is indeed fulfilled and we all pay the price in the end.
Here endth the lesson.
Place no faith in false prophets, faithful readers! Stay tuned for further updates as the leemings storm off the cliff and the markets warrant!
On the crude side, the market breached the psychological barrier de jour of $129 a barrel today. Having fallen back after briefly breaching $100 on January 2, it has since rallied and not closed below a C-note since the end of February. Fearfully, based on historical market data, there is speculation oil's blistering rally may not abate till it reaches the $140 range. Even more ominously, adding anxiety to recent analyses projecting $200 barrels by 2010, word has come from within OPEC (the Organization of Petroleum Exporting Countries) that they see the possibility of $250 barrels earlier than that.
Amidst all this dizzying and frightening speculation, the petroleum-pummeled masses can be heard screaming, “What the hell’s going on?!”
First and foremost is the value of the dollar. Simple economics; as the dollar looses value it takes more of them to buy a given product. In this case a crucial and highly sought product; oil. Accordingly, with every rate decrease that the Federal Reserve "blesses" us with, the resulting decline of the dollar against foreign currencies will drive up the price of oil and its derivatives. Chief among them, gas.
Next there is simple economics lesson number two; supply and demand. As demand for a product increases, the price of that product will likewise increase unless supply rises to meet demand. In this case, while demand in America was fundamentally flat last year, it continues to roar ahead in India, China and within the OPEC states themselves.
OPEC currently produces 4 out of every 10 barrels of oil consumed daily around the globe. Part of the problem is in addition to not increasing their production, they are siphoning off increasing amounts of oil to fuel their own economies and societies. Accordingly, they are withholding crude from the global marketplace even as demand continues to grow. Exacerbating this already precarious situation, production and exports have actually decreased among key non-OPEC producers such as Russia and Mexico.
Finally, there is the psychology of self-fulfilling prophecies.
The oil market is inhabited by a jittery, nervous and easily spooked lot. They are susceptible to suggestion, rumor and superstition. Herd-mentality is the hallmark of their mindset. They are in a word, lemmings.
When an expert or industry-related official makes a statement regarding future supply and demand and prices, the herd takes that as a sign of things to come. Their language is analyzed for any hidden meanings or underlying messages. They listen closely to hear if Paul is indeed dead. Often they interpret new reports or statements by key players as conventional marketwide wisdom. They are viewed as institutional approval to test the higher limits of the psychological price threshold. Case in point; look at how the market reacted to the release of a Goldman Sachs report projecting the price of oil in the $150 to $200 a barrel range within the next six to twenty-four months.
Magnifying the often arcane interpretations are the very real influences of human and market fear and pessimism. We, and the markets, focus on the negatives around us. They rush to the forefront of our consciousness; they dominate the news. Remember, if it bleeds, it leads.
An unsubstantiated report of an attack on Nigerian oil facilities may result in a price uptick of over a dollar. Follow that up with OPEC's repeated rejections of calls for increased production and prophecies of $200 barrels, then throw in increasing tensions between the United States and Iran and you have a highly combustible mixture of fact, fear and speculation that can result in dramatic price increases in a relatively short time frame. Watch how quickly the markets react should Israel and Hezbollah lock horns again this summer and get back to me later, if you like.
There is also an egotistical element that should not be discounted. The profitability of energy firms and analysts are directly tied to their reputations for accuracy and insight. Leading the pack with “groundbreaking” analyses gets their names in news stories and their faces on cable news.
The more they feed the media beast, the more coverage they get. The more coverage they get, the greater their reputation becomes. The greater their reputation, the more clients they attract and the higher the fees they command. It can quickly become a vicious and dangerously self-propagating cycle. In the midst of it, the markets are mesmerized and driven north by the torrent of negative information being recycled over and over again. The result; higher oil prices which leads to higher gas prices. The self-fulfilling prophecy is indeed fulfilled and we all pay the price in the end.
Here endth the lesson.
Place no faith in false prophets, faithful readers! Stay tuned for further updates as the leemings storm off the cliff and the markets warrant!
