An Oil Bubble?

From a Wall Street Journal cover story, Tuesday, April 18, 2006:

...Investment flows into oil futures are supplanting...supply-and-demand data as prime drivers of prices...In contrast to past bull markets in crude, this year's run-up has occurred even though oil inventories in the U.S...have swelled to their highest levels in nearly eight years... The answer to the puzzle posed by rising prices and inventories...lies not only in supply constraints...and the broad upswing in demand [from] China and India. Increasingly...prices are also being guided by a continuing rush of investor funds into oil markets..."The relationship between U.S. inventory levels and prices has...become irrelevant."

If prices are rising faster than they should given current supply and demand, then there seems to be an oil bubble. What could cause it to pop?

One reason for the anomaly...is temporary. ...refiners have shut down operations to perform maintenance and prepare to meet new government-mandated fuel formulas. ...The last time U.S. inventories were at today's levels, in 1998, the market was about to crash. By the end of 1998, prices fell below $11 a barrel from an average $18.32 in December 1997...OPEC...fears a return to backwardation--the opposite of contango...[which] could prompt speculative buyers to dump inventories; prices could quickly drop $20 a barrel or more, OPEC officials said.

The U.S. Department of Energy has A Primer on Gasoline Prices.

Other sources of information: P K Verleger, Energy Information Administration

Tags: Economics

Updated at: 26 April 2006 12:04 AM

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