How Did Oil Get to $108 per Barrel?

Mar 10, 2008: 8:22 PM CST

Let’s start by looking at the charts of this parabolic rise of this critical commodity:

Daily View:

Weekly View:

Monthly View:

Can you remember how, less than 10 years ago, the price of one barrel of oil cost less than $15? Gas prices in the US cost less than $1.00 per gallon about that time. Filling up most cars cost less than $20. Now, you’re lucky to fill-up most cars for less than $50 at the pump.

But is this a fundamentally driven rise, or a speculator driven one? In other words, is there a real reason for this climb, or is it just because traders are betting that it goes higher, and taking positions expecting to profit in the short-term?

According to a February 2008 Explorer article from the American Association of Petroleum Geologists, oil prices are likely to go higher.

Paul Roberts, author of the prescient book The End of Oil, “Clearly, there’s more than just the fundamentals at play – the Saudis and OPEC have been pointing the finger at speculators, and there’s some truth to that.”

But speculators aren’t solely to blame. Why?

“If it were strictly speculator-driven, some speculators would start making money by taking a short position,” essentially betting that oil prices would have to fall

Production declines have been quicker and steeper than expected, while new production from newly developed areas (like Kazakhstan) have disappointed, Roberts added.

However, “on the demand side of the equation, there’s no uncertainty. It’s just rising steadily.”

“The resulting imbalance, with producers straining to meet increased global demand, has led to soaring oil prices and [angry] consumers.”

Other factors beyond supply-demand (and speculation) do influence crude prices.

“The most obvious is the sagging dollar,” Roberts wrote. “Because oil is priced in dollars, and because the dollar has fallen nearly a third against major developed-country currencies since 2002, Americans are spending more for a barrel of oil.”

However, there’s no guarantee of higher prices, argues writer Ed Crooks. “”Recession in the world’s biggest oil consumer (the United States, which consumes almost one quarter of the world’s oil) plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil price,” he observed.

While futures traders can take advantage of this almost stratospheric trend, consumers do not benefit from higher oil prices, which serve as a tax on drivers and companies. Higher oil/gasoline prices certainly do not help ease the pressures of a possible US recession.

In the meantime, should oil prices stay at, or increase beyond this level, there may be further economical repercussions that affect your personal pocket book that cause you to cut back on other expenses, which again would be a bad omen for the broad economy.

6 Comments

6 Responses to “How Did Oil Get to $108 per Barrel?”

  1. P. K. Says:

    Have you noticed the recent divergence of the oil stocks vs. the underlying? There’s often a message there, esp. with commodity-based industries, which would be that we’re nearing a short-term peak.

  2. Corey Rosenbloom Says:

    P.K.

    I actually have not seen this recent divergence, but will view key oil stock charts now and thank you for the suggestion.

    Martin Pring frequently discusses this phenomenon, in that the actual companies that are tied to commodities actually lead the commodities for a variety of reasons. He uses oil prices and oil stocks (such as XOM, CVX, and others) and also uses gold miners to lead gold prices. It’s a fascinating study, but as you said, it often signals valuable insights.

    Thank you for the comment.

  3. technicalinsights.blogspot.com Says:

    Agreed. The key here is the dollar. Americans are paying more and more for oil because our dollar is depreciating, while people in Europe are paying the same or less because of the strength of the Euro. Things will get really interesting if (some people think WHEN not if) OPEC decides to price oil in Euros instead of USdollars.

    Great blog…keep up the good work.

  4. NTH Says:

    Hi Corey,

    A question for you. Have you a chart which shows oil prices in a neutral currency, such as the dollar index, and which is also re-based in terms of inflation?
    Such a graph is far less ‘frightening’.

    The trend towards peak oil will play a huge bearing on oil prices as we move forward. Its a case of if rather than when. Peak coal will be several decades later though I understand and no doubt people will switch energy sources as the price appreciates. An ‘easy play’ on oil long-term are the majors, such as Exxon, perhaps.

    just some thoughts …

    NTH

  5. Corey Rosenbloom Says:

    I have not created such a chart. StockCharts.com does that by creating simple ratio charts, in this format: $WTIC:$USD
    How to re-base in terms of inflation may be beyond the capabilities of StockCharts or TradeStation, the two major charting programs I use.

    There will be a saturation point (or other economic term) where the price will get so high as to significantly affect demand, such that – like you said – consumers will finally seek other alternatives. There really are a variety of other options, but consumers are not embracing them as quickly as expected.

    Good thoughts!

  6. Corey Rosenbloom Says:

    Technical Insights,

    You’re right. We really don’t think of it that way, but oil is priced globally in dollars, which is why we see this strange negative correlation on the charts between these markets (US Dollar Index and Crude Oil).

    Many Americans would fall over backwards if the currency of oil quotes changed – most still can’t do metric mathematics or measurements. If the dollar keeps heading lower, and oil keeps heading higher, that (quote currency) could indeed change. I’m sure OPEC is frustrated by anger by consumers due to higher prices, when a large portion of it has to do with currency valuations.

    Thanks for reading and for the comment!