Tags: $105 | Oil | Speculation | Just | Crap | Shoot

$105 Oil Speculation Just a Crap Shoot

Friday, 08 April 2005 12:00 AM

Traders' January attempts to forecast the stock market outcome could be likened to a game of 'Pin the Tail on the Donkey.'

At the start of the year, everyone had a prediction about where they think the Dow industrials or NASDAQ composite index might end 2005.

All equity strategists play the same guessing game and then give their opinions to the various media types who in turn write articles claiming to present "analysis" from the best-informed insiders on Wall Street.

But almost anyone can make a prediction on just about anything.

So it was odd to hear Goldman Sachs CEO Henry Paulson defending the March 30 research note from in-house energy analyst Arjun Murti

Murti had upped his forecast for the price of crude oil. In his article titled "Super Spike Period May Be Upon Us," he raised the range for crude prices from between $50 and $80 per barrel to between $50 and $105.

Murti argued that the strength in global demand, especially from America and China, was forcing a spike in the price of oil.

In a recent interview for Bloomberg, Dallas-based hedge fund owner Boone Pickens said crude oil will likely end the third quarter above $60 per barrel. With global oil production at 84 million barrels per day, the world's producers are breaking their necks to fulfill current demand (It's estimated that will be around 87 million barrels per day by the end of this year.)

In a recent interview for Bloomberg, Dallas-based hedge fund owner Boone Pickens said crude oil will likely end the third quarter above $60 per barrel. With global oil production at 84 million barrels per day, the world's producers are breaking their necks to fulfill current demand (It's estimated that will be around 87 million barrels per day by the end of this year.)

Pickens, who owns BP Capital, said his traders were speculating that the bullish energy market would not relent. They are betting that the prices of oil, heating oil and gas will continue to rise as demand simply outpaces supply.

The surge in energy prices will cease only if prices rise to the point that they cripple demand.

Right now, strong demand is taking that high cost in stride. No one knows when the camel's back will break, but Murti believes that global demand will ease only if we reach exorbitant levels.

And that would spark an era of lower-than-necessary output, in turn creating a buffer zone as stocks are rebuilt. He believes that $105 will be seen before we reach that breaking point.

[We recently argued that there was no clear relationship between the price of crude oil and the stock market over time. Read that article now.]

While Pickens – whose company manages $1.8 billion in two commodity-related funds – and Murti agree that only a global economic slowdown will extinguish the flaming oil market, investors are still piling into commodities – including oil.

As the market powers ahead at full speed, it won't take much at the margin to see prices jump sharply ahead.

When Murti released his article, oil was trading at $52.50 – its lowest level in almost a month. But his prognosis caused futures to jump and in just three more trading sessions oil hit a new record high at $58.28 on April 4.

Certainly, some of this is speculation.

Boone Pickens admits his funds are all aboard the gravy train. But last month, the Energy Information Administration said that hedge funds were not to blame for soaring oil prices. Rather it was the tight supply situation causing the problem, they said.

"The lack of both spare capacity and inventory cushions to cover potential surges in demand or disruptions in supply, in a strong demand environment, is the primary force behind currently high prices."

Jeff Fosse at Chicago's Striker Securities Inc. said: "This is a demand-driven market. Commodity funds have been waiting for dips to buy into."

Other analysts note a similar buy pattern adding that speculative purchasing was likely based on the supply-demand inequality expected later in the year.

It's hard to conclude that, just like any other booming market, crude oil is creating a giant bubble. But the surge in economic activity provides a strong and reliable alibi for the moment.

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Traders' January attempts to forecast the stock market outcome could be likened to a game of 'Pin the Tail on the Donkey.' At the start of the year, everyone had a prediction about where they think the Dow industrials or NASDAQ composite index might end 2005. All equity...
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2005-00-08
Friday, 08 April 2005 12:00 AM
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