Crude oil prices touched another record high of $140 a barrel early this week
before slowing down a bit.What is at work - "Demand - Supply gap" or speculation?
In the long term it is demand supply theory for sure - the supply has just not kept pace with the surge in demand in the developing countries
Can you believe it - we face a deficit of about 2 million barrels of
crude per day! Add to this the fact that subsidised fuel prices in developing countries ensure that the consumption does not come down with an increase in prices.
In China for instance, fuel prices at the pump are kept artificially low, and
electricity rates too are subsidized. With no economic incentive to conserve,
Chinese demand for oil, coal and natural gas are soaring. As a result, China’s
oil imports have soared 27% year over year.
However, nothwithstanding the demand supply scenario, it has been speculation which has been a driving force for rise in prices -
It is rumored that investors have stashed about $150
to 200 billion in cash into commodity index funds since 2003. With the stock markets either stagnating or falling even conservative investors have taken a liking for the commodity markets especially crude.
As a result, crude oil prices have more than doubled over the past year.Oil has set 28 new record highs this year alone – and has more than doubled
in the past 12-months. In fact, crude oil prices have soared 697% since late
2001 – the best performing global asset class by far since then.
The last time we saw a run like this was in infotech sector leading up to the dot com bust In fact,
the parallels are eerily similar (see graph above).
work. It takes years to locate, exploit, and fully produce a major new oil field
– and there just aren’t many of those left in the world that remain
undiscovered.
In “reality” oil
should be trading between $80 and $100 a barrel right now amid a slowdown in
global growth. So it has clearly been moving up in the speculative zone
