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Oil is in a bubble. Yeah, course it is, Anatole
By
Dominic Frisby
May 28, 2008
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Thank goodness for MoneyWeek, that’s all I can say. Because, aside from a couple of noble souls at the Daily Telegraph, nobody else in the mainstream media gets it.
I listened to various experts talk for over thirty minutes on Radio 5’s afternoon show last week about the high oil price. Not one mentioned Peak Oil. Not one mentioned out-of-control money supply. Not one mentioned increasing Asian demand..
Yes, oil is overbought; yes, oil is going to correct at some stage…but it’s not a bubble.
Then we had Anatole Kaletsky in The Times tell us the rising oil price ‘threatens to do far more damage to the world economy than the credit crunch.’ He’s right about that. Unless of course you’re long of oil in some form or other, in which case things are looking rather rosy.
Kalestsky goes on, ‘The present commodity and oil boom shows all the classic symptoms of a financial bubble, such as Japan in the 80s, tech stocks in the 90s and, most recently, housing’. Does it?
In a bubble supply overwhelms demand, yet prices continue to rise. In the 1990s tech companies with no earnings issued masses of stock; in the US housing boom-bust, builders built everywhere and there was an oversupply of inventory. Is there an oversupply of oil?
The chart below from IEA statistics shows oil supply and demand 2003-2007.
Since 2007, supply has remained constant at about 85 million barrels per day, while demand is now around 88 million barrels per day. No supply-glut there.
Kaletsky goes on to say that the Gulf is ‘crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell’. Hang on, are you sure?
A bit of research reveals there are in fact ten supertankers ‘cramming’ the Gulf, with about twenty million barrels between them - or less than 25% of one day’s global demand. They are carrying heavy Iranian crude, just at the peak of the refinery maintenance season in Asia and the Mediterranean, when refineries have seasonal shut downs for repairs. It’s just a temporary lack of refining capability for heavy oil, that’s all.
It’s worth noting that just a few weeks back, when oil was $100, George Blake, a geologist who studies hard data, rather than an info-spinning journalist, noted an imminent shortage of refinery capacity in Canada and Australia and said it was going to shortly lead to $160 oil. He was laughed at and dismissed. As we touch $135, it’s starting to look now like one of the calls of the decade.
What about other commodities? Are they in a bubble?
So is this commodities bull market a classic financial bubble as Kalestsky asserts? Below is a long-term chart of commodities prices since 1749:
Since 1792 there have been five major bull markets in commodities. These lasted 23 years, 21 years, 23 years, 18 years and 12 years – an average of 19.4 years. The current bull market began around 2000, so we are 8 years in. If history is any guide, this bull market is not even at the halfway stage. Unless, of course, ‘it’s different this time’ and this is the shortest commodities bull market ever.
We live in an era of unprecedented global money supply growth. These higher nominal prices we are seeing for everything are illusory and distort perspective. Here is a chart of the CRB (the Commodities Research Bureau overall price index), adjusted for inflation:
That should give you an idea of how far this commodities ‘bubble’ has to go. Of course, nothing goes up in a straight line and there will be nasty corrections on the way. Oil is due for one now. But the larger trend, my friends, is up.
Remember the drivers to this bull market: lack of investment in the 80s and 90s leading to lack of supply now (looks what’s happening with refineries); industrial revolutions taking place in Asia leading to new-built wealth and increasing demand for virtually everything; and a limited amount of natural resources in the world.
But the biggest driver of them all is inflation. It is out-of-control money supply growth that is driving the prices of everything higher. That is the bubble: too much unbacked-by-anything-tangible, easily-issued, digital money (most of it in the form of credit) chasing the same amount of goods. And nobody in the mainstream media or indeed in politics understands it or is talking about it. But they will.
If you think prices are expensive now, wait till there’s a real shortage of something.
Kaletsky closes his piece with the declaration that, ‘The people who tell you that commodity prices today are driven by “economic fundamentals” are the same ones who said that house prices in Britain were rising because of land shortages’. Whoa, whoa. How do you make that leap? Those who’ve been saying buy commodities are people like Jim Rogers, Marc Faber, Michael Hampton and our own Merryn Somerset-Webb. They were also the ones who were telling you to get out of housing. And I bet those that listened and bought oil and gold with the money are damn glad they did.
More likely, the people who are telling you commodities are a bubble today are the ones who were telling you in early 2007, just as you should have been running for the hills, to be long of property and financial stocks. Coincidently, Kaletsky was one of these. In January 2007 he wrote, “The bull markets in shares and property have every reason to continue, at least if we look at economics alone'. Nice call. I do hope you didn’t listen.
Which brings me to my other definition: “A bubble is a runaway bull market in which you don’t have a position’. Perhaps that’s what Anatole really means.
Turning to the wider markets:
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UK shares returned from the break on Monday in a mood reflective of London bank holiday weather, with the FTSE 100 index dropping 29 points to close almost 0.5% lower at 6059. Weaker oil prices prompted profit taking in BP and Cairn Energy, both down 2%. Housebuilders were again weaker, with Barratt Developments off 4% as a large line of stock was sold. But plant hirer Ashstead jumped 11% on bid rumours, while SABMiller gained 7%, again on possible corporate action.
European markets were mixed, with the German Xetra Dax nudging up 0.1% to 6959 yet in Paris, the CAC 40 slipping 0.6% to 4907 as French business confidence fell to its lowest level in 30 months.
US stocks struggled for direction but closed yesterday higher, with the Dow Jones Industrial Average closing at 68 points firmer at 12548, a 0.5% advance. The wider S&P 500 put on 0.7% to 1385, while the tech-heavy Nasdaq Composite improved 1.5% to 2481.
Overnight the Japanese market fell back rallied, with the Nikkei 225 losing 1.3% to close over 184 points down at 13709, while in Hong Kong, the Hang Seng also declined, with a 0.2% slip to 24233.
Commodity prices were generally weaker. Brent spot slid back, trading this morning at $128, while spot gold also dropped to $909. Silver was trading at $17.14 and Platinum was at $2070.
In the forex markets, sterling was slightly stronger against both the US dollar at 1.9818 and the euro at 1.2583. The dollar was trading at 0.6350 against the euro and 103.94 against the Japanese yen.
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