Sunday, June 01, 2008

Beware the Oil Bubble

More people are starting to worry about the big moves into oil speculation by people, groups, and funds that probably should not be investing in speculative commodities.
A sell-off in oil could spell big losses for the pension funds, municipal funds, college funds, unions and other groups that jumped out of equities-market plays and into the indexes, but have little experience or flexibility to deal with fundamental changes in commodities.

"A lot of the accounts that that have moved into commodities over the last 8-12 months clearly don't belong in this forum," said Peter Beutel, president of Cameron Hanover.

"It means that when this market turns, these people are going to get hurt, and they are going to get hurt badly, and there will be tons of lawsuits because they have no understanding how quickly commodities markets can turn and leave them in the dust," he explained.

While many in the energy sector, such as U.S. Energy Secretary Sam Bodman, argue that fundamentals are driving oil's rally, others say investment in commodity indexes has pushed prices beyond what supply and demand may justify, contributing to the 30 percent price rise over $130 per barrel this year.

"We are seeing the classic ingredients of an asset class bubble," said Edward Morse, chief energy economist for Lehman Brothers. "Financial investors tend to 'herd' and chase past performance, comforted by the growing analytical conclusion that markets are tightening, and new flows, in turn, drive prices higher." __Reuters
Because high oil prices play so easily into preconceived notions of "peak oil", too many fund managers have been lulled into thinking that an ever driving oil market is a sure thing from now on out. They have not done their homework.

Present oil prices are not supported by fundamentals of supply and demand. Which means that when reality catches up to the market, and demand over-reacts in a downward direction to over-inflated prices, the downturn could hurt a lot of people.

The US Congress--a zoo of incompetent piglets--has fed into this problem by shutting off normal avenues of expansion in oil production and refineries. This artificial "political peak oil" cannot help but feed into the sense of unreality in the oil markets.



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