The world has changed. Even two years ago, with a war going on by proxy between Russia and Ukraine, we'd have seen a ten dollar rally in the price of crude, not prices below $97, like we're seeing today. Add to that the Iraq crisis in the North, the continuing Syrian conflict, the destabilization in the oil producing countries of Libya and Egypt and you'd have been shocked - at least in 2011 - to see prices go decisively under $100 a barrel and act badly there. What's going on here?
One long-term trend in the oil market and one very short-term trend have made the difference between a price that 'should' be higher, but is in fact going lower. We need to really understand those changes to track where oil prices will go next and where those underlying oil stocks are headed.
Let's take the long-term trend first. For the years from 2003 until just about a year ago, the oil markets were dominated by trade that was mediated by the big investment banks, particularly Morgan Stanley, Goldman Sachs and JP Morgan. Those banks, besides having their own proprietary capital in the forwards and futures markets also developed an army of participants on both sides of the trade, both commercial players looking for risk management of oil but particularly speculative players, both in the form of passive investment and new commodity based hedge funds.
But the banks, and particularly these largest three have abandoned the oil market, selling…