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The Dangerous Bubble in Commodity and Oil Prices

By Al Fin | Fri, 07 January 2011 14:56 | 4

Right now, the printing of trillions of dollars by the Federal Reserve is creating another financial bubble. It is supported only by deficit spending, borrowing, and money-printing. Nothing else is supporting the stock or bond market. Everyone knowledgeable person knows this, but many who are benefitting from the scam choose to deny it. The intent of this bubble is, obviously, to provide cheap capital to the biggest debtors in the world, and to juice stock and bond prices. That helps those who are have obligations and assets created during the previous bubble that went out of control, because it is allowing them to escape before the system blows up, one final time. Meanwhile, many non-connected financial institutions and individual investors are being conned into buying into the bubble through the extensive Orwellian Newspeak that we hear on radio, television and in the business press.

No bubble expands forever. The balloon must eventually pop if too much air is pumped in. The same is true of a financial bubble. If the Federal Reserve keeps pumping funny-money dollars into the current bubble, it will continue to expand for a while, until it finally pops into hyperinflation. On the other hand, if the Federal Reserve stops pumping in the dollars, the balloon will deflate quickly. We may end up in a Greater Depression, but coupled with inflated prices because of what was done. _SeekingAlpha

Commodity prices
WSJ

Commodities have rallied across the board, and large numbers of insitutional investors are betting that the rally will continue through the next several years.

One of the commodity prices followed closely by energy analysts is the price of crude oil. Recent surges in oil prices have prompted many analysts to predict oil prices between US $100 and US $150 a barrel over the next year or two. But is that a sure bet?

Oil bulls risk mistaking tax-driven changes in crude inventories and a temporary rise in heating demand for a lasting transformation in the outlook.

The recent rally, which has seen spot oil prices rise almost $20 (28 per cent) since August 2010, has been driven more by expectations about future tightness than current fundamentals.

Market participants are convinced strong demand growth in emerging markets, coupled with recovery in the United States, cheap money policies and Saudi Arabia's refusal to raise output, will work down excess inventories and tighten the supply-demand balance in 2011.

But inventories of crude and refined products remain comfortably above five-year averages. Saudi Arabia and other OPEC members hold 5 million barrels per day (bpd) of spare capacity. Non-OPEC production is growing briskly. Refiners have plenty of spare capacity. And there is a good balance between product demand and available crude oil inputs. _CalgaryHerald

If institutional investors catch wind of a deflating bull bubble-stink, prices could fall abrubply.

Crude may decline to as low as $82 or $80 a barrel if hedge funds and other speculators decide to take profits by selling contracts, Petromatrix’s Managing Director Olivier Jakob said in the report. It last traded at $88.52 a barrel in New York as of 12:22 p.m. London time.

“If there is some genuine profit taking from large speculators then we need to consider the risk for further downside,” Jakob said. _Bloomberg

Oil dictatorships like Russia, Venezuela, and Iran tend to be particularly belligerent when oil prices are high -- and are expected to go even higher.

Big investors who help to drive oil prices higher than fundamentals could do, are also feeding political instability and despotism in the third world, and economic uncertainty in their home countries. The smart ones are able to profit from such uncertain and instable conditions, if they move fast enough on the shifts.

The Obama administration has taken a lot of steps to shut down US production of coal and oil. Obama's EPA is working to clamp down on Canadian oil sand imports and on US production of shale oil. But political peak oil -- and the resulting artificial oil price bubble -- a la Obama will not affect the US' neighbors.

Cuba is diving into the offshore oil drilling game -- hoping to cash in on Obama's ongoing de facto Gulf of Mexico oil moratorium. Cutting corners on safety and environmental protections, Cuba's Venezuelan, Spanish, Norwegian, Brazilian, Indian, and Chinese partners are not particularly concerned about the environmental fallout along the Eastern US coast and fisheries, in the event of a massive spill. Certainly Mr. Obama is not likely to complain very loudly -- even if the environmental damage from a Cuban spill is orders of magnitude larger than from the BP spill. In the event of a Cuban spill, Obama is likely to turn against US oil companies to make it even harder for them to drill in US offshore areas.

Politically contrived bubbles in commodity prices abound. Bubbles within bubbles. And although human stupidity may be forever, individual bubbles always burst.

By. Al Fin

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  • Anonymous on January 07 2011 said:
    Not quote sure this argument would last an R-Square statistical correlation analysis, as commodity prices have at times shown in inverse relationship with money supply. For example, between 2005 and 2008 the money supply growth was nominal, yet oil trebled in price. Furthermore, the Fed isn't or hasn't printed trillions of Dollars - in recent QE2 terms it is valued at best $600 billion, while recent commodity price gains have exceeded the monetary injection.I have no doubt that monetary expansion has played a part, but you have to look at other reasons for the oil/commodity price increases, such as lack of supply response to growing demand, both here in the OECD countries (ignoring the peak demand forecasts, as they ignore relocation/renationalisation of manufacturing effects) and especially so in Asia/China.
  • Anonymous on January 08 2011 said:
    Your comment; "Cutting corners on safety and environmental protections, Cuba's Venezuelan, Spanish, Norwegian, Brazilian, Indian, and Chinese partners are not particularly concerned about the environmental fallout ...", is irresponsible and incorrect. Most of the IOCs operating in Cuba are already operating in the U.S Gulf of Mexico and are members of the IADC..it is in their best interest to be overlly cautious and prudent as they ready themselves to drill the Jaguey prospect just 60 miles south of Key West. Trust me...they are going to cross every "t" and dot every "i" after the Deepwater Horizon fiasco...their reputation and finacial return are on the line..the depth of the prospect is 5.600 feet deeper than Macundo.
  • Anonymous on January 10 2011 said:
    The printed page poses several disadvantages for my good self. For instance, the statement by Mr Jacob about speculation is pure ignorance, and the suggestion that the oil price is a bubble is worse. In a seminar room or a conference where I was present, anyone making statements of that nature would hear some things that they would rather not hear.My new energy economics book clarifies this at great length, but I do NOT believe that my logic will be accepted by the great unlearned. For instance, the statement referred to in the Calgary Herald is intended for know-nothings, and has no place in this forum. I strongly suggest that Mr Fin and a few others should read the second paragraph in the comment by Prof Baldwin, and spend a little time thinking about it.
  • John on January 17 2012 said:
    It's strange the way Americans see themselves and their country: the rest of the world thinks that the USA is the one that cuts corners with environmental and safety standards.

    None so blind as those that will not see.

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