Sunday, July 27, 2008

The bubble begins to burst

From Financial Times:

Oil prices continued their correction this week as the debate about the influence of speculators in energy markets reached a new pitch.

The US Senate yesterday failed to agree on proposals to limit excessive speculation in energy markets and, with oil prices becoming a huge political issue in a presidential election year, attention turns to the House of Representatives, which will debate the issue next week.

But with US lawmakers about to break for summer holidays, any change to regulations governing oil trading appears unlikely before September at the earliest.

Nymex September West Texas Intermediate sank $2.99 to a session low of $122.50 a barrel on Friday, down 5 per cent this week.

ICE September Brent lost $3.05 to a session low of $123.39 a barrel on Friday, off 5.9 per cent this week. Hurricane Dolly caused minimal disruption to production in the Gulf of Mexico and the ending of that threat contributed to selling pressure this week.

The correction for oil prices has lasted two weeks with Brent down 16.3 per cent since hitting a record $147.50 on July 11 while WTI has sunk 16.8 per cent since reaching an all-time high of $147.27 on the same day.

[. . .]

The correction in oil prices has weighed heavily across agricultural commodities, base metals and gold. Renewed fears about the health of the global financial system and the outlook for economic growth has prompted many hedge funds and short-term momentum players to cut back on their commodities exposures.

First the tech bubble then the housing bubble and now the oil bubble. These kinds of things have always happened (remember the tulip craze in the 1600's?) but why are they hitting us one after another like waves upon a beach?

Of course there are sound market reasons for a downward correction in the price of oil. One is that the momentum has shifted in favor of drilling in the US and the second is our success in Iraq. Now that it no longer looks like the region is going to dissolve into chaos with the jihadists emerging in control there is much less uncertainty about future supply.