More on the Price of Oil
Powerline
Our post yesterday on the odd correlation between the price of oil and the American Presidential election has drawn a lot of reader email, much of it very informative. This contribution came from a reader who works as an analyst of the oil and gas industry, based in Russia:
Could speculators, particularly George Soros, have recently driven the price of oil far above what fundamentals would dictate for political reasons? The answer is: quite possibly, but speculators cannot work in a vacuum, and there are many other factors at work here. While Mr Soros has operations that are large enough to have an impact on a single market – just look at what he did to the British pound – he is certainly not the only player out there that was betting on higher oil prices, and none of them could have had much success if there wasn’t a genuine market imbalance, or near imbalance, to leverage off of.
In particular, the demand/supply balance of world crude is extremely tight. The Saudi’s are down below 1 mmbbl/day of excess capacity, and everyone else is producing at maximum capacity. Saudi Arabia’s excess capacity has been quickly diminished over the last 18 months by unexpectedly high demand growth in the US and China, but particularly China. In addition, there have been several issues hanging over major suppliers to make the market nervous: The Iraq war (threatening, and often interrupting a significant portion of its 1.5 to 2 mmbd production), the 'YUKOS Affair' in Russia (1.7 mmbd threatened), political problems in Venezuela (2.5 mmbd threatened), and some production shutdown by Hurricane Ivan in the Gulf of Mexico (1.6 mmbd produced in the Gulf as a whole, although not all was affected by Ivan).
There was a good article in yesterday’s WSJ on how hedge funds are starting to pull in their bets on higher oil prices, and that has been behind the most recent fall in prices. Three reasons were given in the article for the pull back. First, warm weather in the US, or the absence of a cold snap, disappointed those betting on a surge of heating oil demand. Second, US stocks of oil are building back to normal. Finally, Gulf of Mexico production is returning to normal after the hurricanes (part of the reason, of course, that stocks have recovered).
tonto.eia.doe.gov
In conclusion, Mr Soros may have been playing in this market. It is, after all, his business. It is also possible that he was doing so in hope of damaging President Bush politically. He has made that his business as well, of late. We can only hope he was going long heavily, say around $55, and has therefore possibly lost even more money than he did on MoveOn.org. |
