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Oil = $50 a Barrel

Oil broke a psychological barrier last night: $50.

As I have been lamenting for quite some time, this is not due to a "terror premium." Oil is rising in a response to demand from Asia, especially China.

Click for larger graphic

Graphic courtesy StockCHarts.com, RealMoney.com

As the chart above makes clear, after 9/11 there was brief plunge in oil prices. This reflected the expectation that the global economy would slow. It snapped back from that fairly quickly. Oil prices were then stable from April 2002 to January 2004 -- hardly a terror premium.

Here's a more recent history of oil prices relative to events:

Click for larger graphic

Graphic courtesy WSJ

The WSJ observed:

As oil topped $50 a barrel Monday, "one of the world's most important fuel gauges -- U.S. commercial inventories of crude oil -- signaled that the surge in prices may well continue. Inventories in the U.S. have plunged substantially below last year's level, confounding predictions by many analysts that stocks were building.

That may portend bigger jumps in the price as the Northern Hemisphere approaches winter, the season of peak oil use due to consumption of heating oil. To rebuild stocks and keep refineries humming, the actual users of oil -- rather than speculators -- are likely to snap up petroleum, keeping up the pressure on prices.

The decline in American inventories is roiling markets because the U.S., as the world's largest oil user by far, is the main setter of world prices. The fall in stockpiles was exacerbated by Hurricane Ivan's hammering of key producing and transport facilities in the oil-rich Gulf of Mexico. Oil output in the U.S. gulf is still running about 25% below normal, robbing U.S. refiners of needed supplies and prompting the Bush administration to make some emergency loans to buyers from the U.S. government's Strategic Petroleum Reserve. The government is considering making more such loans."

I suspect that $40-50 is a likely range for the next year or so. Look for events to conspire to create oil hitting $57 sometime in Q1 2005 . . .

Sources:
Market Challenged by Macro Concerns
Barry Ritholtz
RealMoney.com, 9/22/2004 3:37
http://www.thestreet.com/p/_rms/rmoney/barryritholtz/10184276.html

Low Oil Inventories in U.S. Signal High Prices May Stay a While
BHUSHAN BAHREE
THE WALL STREET JOURNAL, September 28, 2004; Page A1
http://online.wsj.com/article/0,,SB109631888189629185,00.html

Tuesday, September 28, 2004 | 06:19 AM | Permalink | Comments (9) | TrackBack (1)
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Comments

Instead of a "terror premium," what about an instability premium? In other words a rise in direct proportion to prospects of regional stability?

Posted by: memer | Sep 28, 2004 4:33:35 PM