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Random Thoughts as Oil Nears $102

Markets work over the long term, and leave scars in the short term.

What a difference a few months make! Crude oil began the year at roughly $96 per barrel. It surged to $145 by mid-July, and has plummeted to near the $102 level today.

Massive amounts of cash flowed into the commodity markets this year, looking for the next hot ticket after the debacle of the mortgage-backed and CDO markets. Prices, predictably, moved upwards. But the 50% price increase clearly was not linked to any change in global demand, and the decline in the dollar, often pointed to as a bogeyman, was itself propelled by speculation.

Over the long term, markets work, and people think rationally about the price rationale for any asset class. Demand for oil has dropped, especially gasoline, and the prices have followed. Big-time. More attention is focused on drilling and alternative energy than would have seemed possible in January. The dollar is out of the doghouse, temporarily anyway, and I’m sure blackhedd can explain the reasons better than I can. Psychologically, IMO, the Russian invasion of Georgia had to be a factor interrupting the romance with the Euro.

But there are scars. The travel and tourism industries have been hit badly, prompting thousands of layoffs. Ditto for restaurants. Consumers have seen the impact of high energy prices on their grocery bills. An already shaky job market, reeling from the pain in the finance sector, did not need another influx of joblessness created by another bubble.

It would be very interesting to have a crystal ball to see the impact of the bursting energy bubble on that financial sector. Hedge funds – the term sounds so prudent and risk averse. But hedge funds have morphed into big speculative players, concentrating and intensifying risk rather than hedging it. One suspects they loaded up on commodities in a big way. One wonders if they unloaded in time, and to whom.

Some surprises are in store for the markets, no doubt!

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