Oil speculators pushing prices to new levels - Part 2

Lehman Brothers, the investment bank, has estimated that fuel is 30 per cent overpriced because of an influx of money into the oil market from investment funds.

It believes that hot money accounts for between $20 to $30 of the recent increase in oil prices and that about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year.

The price hit a record of nearly $120 a barrel on 28th April 2008, after North Sea production was shut down because of the Grangemouth refinery strike. In early trading, the price of US light crude rose $1 to $119.93. Prices later retreated to settle up 23 cents at $118.75 a barrel.

The situation may get even worse in the coming months. Chakib Khelil, the Algerian Energy Minister and president of Opec, said that crude could reach $200 a barrel.
The price rise comes despite a 400,000 barrel-a-day reduction in physical demand from the United States, which is consuming less because of its economic slowdown. This has been more than offset by funds seeking alternative investments to the falling US dollar.

Michael Waldron, energy analyst for Lehman Brothers, said: “There has been an increase in financial demand as many funds have poured into oil as a hedge against inflation and the weakening US dollar. This has been the main factor in driving the price in recent months. We do not think the fundamentals justify oil at $120 and, without financial demand, we think it would be trading at $20 to $30 below that level.”
Analysts fear that the price will rise even higher as supply shortages get worse in the coming months while both physical and financial demands increase.
On the supply side, shortages may occur if there is a bad hurricane season in the Gulf of Mexico and because the oil industry typically saves maintenance work at fields such as the North Sea for good weather.
Rapid economic growth in the Middle East has led to a large increase in energy consumption, which is diverting oil and gas away from export markets to feed domestic needs. This has exacerbated the effect of rising energy demand in the region.
Yesterday’s increases came as the workers at Grangemouth, which is operated by Ineos, a chemicals company, began the second day of a two-day strike over pension benefits.
This forced the closure of the 700,000 barrel-a-day Forties pipeline and sparked fears that Scotland and the North of England could face petrol shortages. Grangemouth supplies 10 per cent of the UK’s petrol but also produces power for BP’s Kinneil plant, which processes the oil from the Forties pipeline.

The impact:
The high price of oil is having an impact on the global economy, with airlines failing and drivers paying more to fill their cars. Eos, the business-class-only airline, went into Chapter 11 bankruptcy protection yesterday and joins at least six other carriers that have also been grounded in the past two weeks by high costs.

Conclusion:

Though the report is not all conclusive, and I would further investigate into the matter but seems as of now is:

• Lot of fund managers are putting money in Oil to hedge against weakening dollar and recession.
• Lack of sentiments in equity market world over is driving money towards Oil & Oil bonds.
• When the physical demand for oil would join the financial demand, the prices would accelerate northwards without any brakes...all leading to a bubble.

Oil Rally - a bubble in the making! Part 1

It started with financial asset bubble burst in Japan with the Collapse of banking system, followed by Technology bubble burst then with recent and most devastating real estate bubble burst. I believe oil rally is yet another bubble in the making, which would burst and would impact several economies severely.

Oil's meteoric rise to near $120 a barrel looks like more than just another economic bubble - growing demand and tighter supplies are likely to keep prices high. Some analysts say even $200 a barrel would not be out of the question.

The latest price surge - pushing crude to record heights in recent weeks, and to nearly double its level a year ago - has some key components of a classic bubble, when market prices climb far above their intrinsic value. The burst comes when investors realise the assets are overvalued. But growing worldwide thirst for crude, in large part from the rapidly developing economies of China and India, means frustrated consumers probably won't get any relief.

"We can do our homework, but prices are going to go where they want to go at this point," said Jeff Spittel, an analyst at investment bank Natixis Bleichroeder.

Oil came close to $120 a barrel on 25th April 2008, on news that a ship under contract to the US Defence Department fired warning shots at two boats in the Gulf that may have been Iranian. The markets were also weighing the effects of a pipeline attack in Nigeria and a looming refinery strike in Scotland. Retail gas prices, which at times rise in tandem with crude oil, moved further into record territory near $3.60 a gallon.
 

The Organisation of Petroleum Exporting Countries - which supplies about 40 per cent of the world's crude - insists it's supplying more than enough oil. Instead, many observers blame speculative traders for bidding up the price as a hedge against inflation and as protection from the sinking dollar. Some see that as evidence of a bubble.
 

It's also becoming harder and more expensive for oil companies to find and tap new petroleum reserves - a troublesome scenario given forecasts that the world's energy needs will escalate by more than 50 per cent in the next two decades. Toss in the weak dollar and political instability in some oil-producing countries, and it seems unlikely that oil will fall below $100 a barrel anytime soon, if ever.
 

Widely watched oil price prognosticator Goldman Sachs has said oil could average $110 a barrel by 2010, up from a previous forecast of $80, and that a spike as high as $200 a barrel is possible in case of a major supply disruption.