Events Searching For Reasons

The conflict between Russia and Georgia isn’t pushing crude-oil prices any higher, even though Russian attacks hit very close to an oil pipeline that carries crude to Western markets. The pipeline stretches through Georgia, from Baku, the capital of Azerbaijan, to Ceyhan, in Turkey. Yet earlier this year, geopolitical worries and pipeline bombings in other parts of the world contributed to crude’s three-digit tear.

Some were expecting the escalating war in Georgia would provide for a smart rebound in oil prices, and hence other commodities as well. Well, that happened for about a couple of hours and then the selling continued. It seems that analysts are saying that this time oil prices won’t get a boost unless fighting spreads because the idea of falling demand has taken such firm hold in the market lately. That to me is pure BS. When oil price rocketed from US100 to US$145 barely taking a pause, any slight incursions in Nigeria, Iran or Iraq would be flashed in headlines as very troubling for supply side - hence justifying the price rally.

I along with many have put forward speculators as the main culprits for driving prices higher. That of course was criticised heavily by plenty as well, in particular chartists and traders. I remember reading Jim Rogers even saying that those who are blaming the speculators don't know anything about the markets. I thought OK, the man is rich, successful but please la, don't make such big statements, it make the person sound very silly indeed.

Crude futures set a record just above $145 in early July, but have since receded as demand indicators worsen and as recession worries multiply. Some even link the stronger USD as directly causing the commodity prices to weaken. In actual fact, its the reverse cause effect, its the weaker commodity prices that is causing the USD to rally. The natural negative correlation between the two has been confirmed over the past 3 years.

The plunge in oil prices and other commodity basically confirms the amount of speculation which resided in the market place. What we are seeing now is commodity index funds unwinding, deleveraging and taking money off the table. If you are genuinely concerned over oil running out, why the sell down? If the tons of new money rushing into the commodity markets was fundamentally based, we would not have seen this rapid sell down. Hence suffice to say, much of the new funds which entered the markets went long and rolled over and over, a strong cumulative effect. If this is not signs of over speculation, I don't know what is. There will always be people who can justify prices at every single level. Oil at US$160 sure, the old reasons will come out, go and project 5 and 10 years down the road how demand will outstrip supply. Give them US$80, a new set of reasons will come out as well.

I am not a bear on oil prices because I think the era of cheap oil (i.e. below US$60) is over. I still think oil will stay at around US$105 for the rest of the year, before moving to US$125 as the average for next year. At US$105, we must remember that that is still a huge year on year hike.

p/s photos: Michelle Saram