Thursday, October 17, 2013

Different takes on oil prices in 2008

It’s interesting that the fundamental investor and the economist attribute the 2008 rise in oil to supply and demand while the traders attribute it to speculation. In hindsight, I guess Paul Tudor Jones was probably the most correct in his balance of the two. But I think there’s a lesson in psychology in here somewhere. To the man with only a hammer…

Government Take Force report:
The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.
Warren Buffett on CNBC in June 2008:
“It's not speculation, it is supply and demand. … We don't have excess capacity in the world anymore, and that's what you're seeing in oil prices.”
Ben Bernanke in July 2008:
"If financial speculation were pushing all prices above the level consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But, in fact, available data on oil inventories shows notable declines over the past year."
George Soros in an interview with the Telegraph in May 2008:
“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.
Paul Tudor Jones in a June 2008 interview with Alpha magazine:
“It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products. Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.”