The flood of speculative investment into oil markets is inflating a price bubble that could pop and send crude prices sharply lower if U.S. petroleum demand continues to slump, analysts warned yesterday.Most economists have been saying that it's been speculation, not demand that is driving higher prices. Americans have been using less fuel of late and that alone should have reduced prices by several dollars a barrel.
Crude prices continued their remarkable rally yesterday, rising 95 cents (U.S.) to close at another record high of $105.47 on the New York Mercantile Exchange.
But the boom could be setting the stage for its own undoing, many analysts argue, since it is being fuelled by speculators looking to hedge against a declining U.S. dollar and devalued financial assets. Some analysts are forecasting a sharp correction in the price of crude this spring.
“It's hard to argue that prices should be higher [now] than they were not too long ago,” said Michael Lynch, president of Strategic Energy and Economic Research Inc., of Cambridge, Mass., who has forecast that crude markets are set for a massive correction that could eventually bring prices as low as $50 a barrel.
Hugo Chavez's saber rattling may have something to do with the price rise but not to the extent we've seen. Even OPEC knows the price elevation is a house of cards and has called for maintaining current levels of production--a practice that generally doesn't happen if demand remains high (this after a debate to reduce production). The oil sheiks seem a bit perplexed as to how to proceed; should they reduce production, the price will go higher ensuring a more serious collapse, should they increase production, the price will stay high as speculators continue to bid it up. It's lose-lose for OPEC and any people with money invested in oil futures. When this collapse comes, it will be devastating, especially if the price drops rapidly by more than half as predicted.
Exit questions: If the oil futures market does indeed take a nose dive, what effect would that have on the economy in the US? Could it have the same effect as the cataclysm in the housing market? I'm not an oil expert but it stands to reason that a drastic reduction in oil prices would effect the bottom line of Exxon/Mobil and other oil conglomerates.
On the upside, it may well spur increased business activity in the construction industry, as they've cut back on consumption due to soaring diesel and gasoline costs.
Update: Instapundit linked. Thanks Professor Reynolds.