Frank P. Leuffer thinks there may be an oil bubble too:
“Oil prices have soared from $32 a barrel at the beginning of the year to an all-time high of $50 a barrel at the end of September largely on the fear of supply outages stemming from terrorism and a series of odd events. Interestingly, virtually every fear so far has gone unrealized.” Terrorism has not removed a single barrel of oil production. Oil output in Saudi Arabia.. non-OPEC production has been higher and less volatile than in the past……….Recently, the growth in oil demand has begun to slow in response to high prices and slower economic growth…… And what will cause oil prices to fall? Three factors will put downward pressure on oil prices. First, a continued rise in inventories should justify a lower price fundamentally and reduce the fear premium. (OPEC production should exceed fourth-quarter 2004 and full-year 2004 demand by 2.55 million barrels a day and 2.75 million barrels a day, respectively.) Second, the absence of a supply shock should also reduce speculation. In other words, no news is bad news for oil prices. Third, a weakening price will feed on itself. Traders are driven by momentum. A break in the oil price could trigger a liquidation of large speculative positions which, in turn, could lead to even lower prices. These are the things that usually cause bubbles to burst.”I’d add a fourth; the next rise interest rates may well tip the speculators into the bear camp. And this would obviously represent a win-win situation for the Fed – they get to raise interest rates to a level closer to their natural rate and also remove one of the main sources of worry about the economy. Bring on the next quarter point rise – or maybe make that a half? Posted by wardx107 at October 4, 2004 9:22 AM