While it feels like months, it was just over one week ago that NYMEX oil futures (traded in New York, representing West Texas oil) traded as high as $107/barrel due to turmoil in the Libya and other Middle Eastern countries. Earlier this week NYMEX oil futures traded as low as $96 due to the belief the decline in Japanese demand would lead to a global drop in economic activity. (Read all about Japanese stocks and Japan news here)
Certain politicians like to blame “speculators” when oil prices are high, but nobody talks about “speculators” when crude oil prices drop. The truth is traders, both hedgers (commercial operators) and traders who speculate on oil among other commodities move crude oil prices both ways. In the futures market there is a buyer for every seller and a seller for every buyer. The crude oil buyers at some point have to offset their purchases with sales and visa versa. In other words, while markets can overshoot at times on both the upside and the downside, it is basic conditions that ultimately determine price.
And what are those conditions currently for crude oil and crude prices?
The situation in Japan is certainly tragic and in the short run will exert a depressing influence on oil prices due to reduced economic activity in the world’s third largest economy. However, the situation in the Middle East remains unclear and is certainly not settled yet.
With OPEC accounting for 40% of global oil production, until there is calm in that region — not likely anytime soon — this will have a supportive influence on oil prices. And then there is one other major factor that could be the most important in the longer term, and that’s the debasement of important world currencies (including the dollar and the Yen). As debt climbs, as money is printed by Central Banks of the world, the price of money goes down.
The opposite side of this coin is the price of real goods (and oil fits in this category) will rise. This is Economics 101; unless the supply of something increases, it’s price will rise assuming stable or growing demand and that rise is always accelerated in the terms of a currency that is falling. And one last point; as Japan is able to work past this initial tragedy and shock they will begin to rebuild — and that will also increase global oil demand.
Last December oil prices were in the low $80s. Don’t look for them to return there anytime soon!
George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: gkleinman1@gmail.com. Phone 800-233-4445.
