Disinterested Party: Oil Prices Will Fall

Lynne Kiesling

Stephen at Disinterested Party has a post in which he argues that oil prices will fall. In short, he thinks it’s a combination of slowing demand and fleeing speculators once that demand slowdown hits the market. His take on speculation:

Then there’s speculation. The oil market’s behavior this past year has been perplexing. Sure, there’s been a supply/demand imbalance, but not enough of one to account for current prices. However, factor in the huge bets on higher oil prices being made by hedge and pension funds—largely via indexed products developed by companies such as, surprise, Goldman Sachs—and things look a lot clearer. Particularly with so few investors willing to short oil.

How big is that speculative premium? Last summer, when oil was around $45, the industry consensus was $7-8 a barrel. Which means—other things being equal—it’s probably now at least $10.

I do not know how much of the price increase is driven by speculation, so I have little reason to doubt this estimate. I do know, though, that the effect large pension funds and hedge funds may have on prices in energy markets is a very live issue with many people with whom I converse.

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