Better to Speculate than Never?

Here are a pile of facts. Oil is trading at about half of its all-time high (over $147 last year), but double what it was trading at just a few months ago. Experts have noted that demand for gasoline has remained low and is expected to decline 3% over 2009. Governmental policies are clearly reducing gas consumption (increasing efficiency by 30%) through new fleet average mileage requirements announced by the Obama administration in May: “While the 30 percent increase translates to a 35.5 mpg average for both cars and light trucks, the percentage increase in cars would be greater, rising from the current 27.5 mpg standard to 39 mpg starting in 2016. The average for light trucks would rise from 24 mpg to 30 mpg.” MSNBC.com (May 19^th) OPEC isn’t even trying to push the prices higher by withholding supply – there’s lots of oil on the market. It’s not the “nasty Arabs, crazy Iranians and out-of-their-mind Venezuelans.”

Then why are gasoline prices skyrocketing as demand is falling? Instability in Iran , especially because of the recent presidential election? The hardliners in Israel opposing the Obama’s push for a middle ground? Not really… it’s that “market crash causing” demon coming back again – speculation. With few clear vectors to profits, commodities are increasing in popularity for those with doubts about the future and who want something tangible to put their money into. Since real estate is still plunging (some predict as high as a 41% default rate in commercial real estate in the next 18 months), the only tangibles of value they see are commodities… and oil and gold are the kings of that market. Lots of investors think the stock market is still too unstable to be the primary investment vehicle.

Oh, and there is another demon based on the U.S. government’s need to borrow massively (selling its treasuries, diluting the value of its currency) to fund the huge deficits to which we have committed to “stimulate” ourselves out of this mess. As a result of that harsh reality, the dollar is falling against the average global currency values, even though many predict that Europe will “recover” more slowly (even reach “bottom” later) than the U.S.

According to the June 13^th SmartMoney.com: “As the U.S. government goes hat in hand borrowing money to fuel unprecedented deficits, the rest of the world (our creditors) is understandably concerned…. After all, more than 50% of the world's debt is denominated in dollars. As the greenback falls, those creditors, most notably China , get paid back with something much less than they bargained for. Indeed, the U.S. Dollar Future Index, a measure of the greenback against a basket of major currencies, has crumbled nearly 11%, to less than 80, from a 52-week high of more than 89 in early March. That might not sound like much, but it has some pros feeling certain that a full-blown currency crisis is only a matter of time.”

In a strange way, those countries that have hard value commodities (e.g., oil in Canada, minerals in Australia) have been currencies of choice for some commodities traders – a double-down against both the fall of the dollar and increased value of underlying commodities, which are themselves rising because of speculation and inflation. Little bits of news “fuel” oil speculators’ investment strategies. Lots of folks were thinking that the “barrel/dollar” linkage would soon be replaced by some other currency or bundle of currencies, but when Russian finance chief Alexei Kudrin said that the dollar will be around as the standard by which oil prices are measured, oil prices dipped on June 15^th.

As speculators buy oil futures because they are betting on the increase in the value of oil, obviously more buyers in the marketplace makes the price of oil go up. So guess what, the speculators’ “belief” that oil prices will rise is vindicated, so more folks buy oil futures – oil prices continue to rise. Okay. But if the demand for oil does not rise to meet the price expectations of the speculators… on one fine day… one might suspect that the reverse waterfall, taking the price of oil down rapidly. Yeah… unless the dollar falls even more…

I’m Peter Dekom, and I approve this message.