Blame the speculators (No, really)
Remember when speculators were getting blamed for high oil prices? Remember how I thought it was bogus? Now oil is down more than 50% from its summer highs. And this time, I think it's safe to say speculators have a hand in it.
It looks as if the last time I wrote about the greedy-speculator meme was July 7. Those were the days, huh? Those of us sympathetic to the Peak Oil crowd were beside ourselves: Yes, oil had likely run up too far too fast, but it was frustrating as hell to see "speculators" take the rap while long-term supply-and-demand issues got swept under the rug.
Now, a little over three months later, where do we stand? We stand somewhere, no one knows exactly where, in the process of a Great Deleveraging: "All the hedge-fund fast money that poured into commodities is pouring out now as the redemption orders pile up fast and furious," I wrote last week.
A story in today's Wall Street Journal fleshes out this theme:
Hedge funds, responsible for a large amount of the speculation in crude oil, have had to play defense in the credit crisis lately by unwinding trades that use a lot of borrowed money, such as oil futures bets. Hedge funds are also being hit by heavy redemptions as risk-averse investors cash out. This forces funds to sell at inopportune times, adding to the spiral…
Jeffrey Currie, Goldman's head of commodity research, said it was the credit crunch and its impact on the U.S. economy — more even than soaring prices this summer — that have so sharply eaten into demand. Gasoline purchases have fallen more so far this month than they did in July, when prices were at records.
"The credit issues have had a severe impact on economic activity and especially on the oil industry," he said. "If this was all just about pump prices, the cratering would have been much more severe in July than in October. But it's been the other way around."
And yet, all you hear from the pundit class — and indeed most of this WSJ article is shot through with the same garbage — is that the falling oil-price story is primarily one of falling demand. An "Americentric" perspective lures lazy thinkers into believing lower fuel consumption in the United States can be extrapolated worldwide. Not so: Second-quarter car sales were indeed down 7% in developed countries… but up 20% in Brazil, Russia, India, and China.
For now though, Outstanding Investments editor Byron King has updated his short- and medium-term oil forecast: A potential dip down into the $50s, and eventually up to $200… all in the next 36 months. His reasoning here.
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