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Are We in the peak of an oil bubble?

Lisa Zyga, PhysOrg
Since 2003, worldwide oil prices have quadrupled.Australian truckies threaten two-week strike According to a newdy, the price of oil is rising at a faster-than-exponential rate, and cannot be sustained. In other words, we’re in the midst of an oil bubble, say researchers Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China.

By analyzing oil prices over the past four years, the researchers have demonstrated more support for the hypothesis that the recent oil price run-up has less to do with supply-demand interplay and more to do with speculation.

In their analysis, the team gathered data on oil prices since 2005 in US dollars, euros, and other major currencies (to confirm that the results are not a consequence of the weakening of the US dollar). They also examined worldwide oil supply and demand data, specifically investigating the extent of increased demand from emerging markets such as China and India.

Then, the researchers analyzed this data using a method that Sornette’s group started to develop in 1996 that identifies bubbles as “transient superexponential regimes” – basically, areas of rapid growth that occur due to a source of positive feedback within the system.

… the models showed that the bubble is close to a local peak, and we may have even reached the peak already. On the other hand, the researchers noted, this critical peak may also be embedded in a larger-scale bubble, one that could develop in the coming months and years.

… “I expect rather soon some calming with a correction of the price,” Sornette said when asked about his prediction of future oil prices. “But it seems that, for the medium term, one has to be bullish on oil.”
(7 July 2008)
The article has a rather deceptive ad – in the format of a headline – just before the start of an article. (“Want Lower Gas Prices? – Drill Here. Drill Now. Pay Less. Learn how to make this happen… “)

Bad journalism, to mix content with paid advertising. Keep ’em separate, and keep ’em labelled. -BA

Are big bets by speculators driving up oil?

Adam Shell, USA TODAY
Experts disagree on what’s behind rising crude prices

Speculation about whether speculators are to blame for the superspike in oil prices is in overdrive.

… But without full knowledge of who all the players are and how big their positions are in the oil futures market, both regulators and politicians admit it’s tough to prove their suspicions. “At this point, we simply don’t know what role speculation or manipulation is playing in price increases,” Sen. Dick Durbin, D-Ill., chairman of the Appropriations Subcommittee on Financial Services and General Government, said in a recent statement.

… The emergence of commodities as an “asset class” – no different than stocks or bonds – is causing concerns. Big institutions have decided to boost their long-term, buy-and-hold portfolio weightings in commodities. In March, the California Public Employees’ Retirement System (Calpers), the largest U.S. pension fund, said it may increase its commodities exposure to $7.2 billion from less than $1 billion by 2010. These funds are being branded as speculators because they have no intention of taking delivery of oil, unlike airlines or trucking firms.
(1 July 2008)

Oil majors: Oil price hike due to fundamentals, not speculation
The week started with news of another gathering of producers and consumers in Madrid, Spain following a land-mark meeting hosted by Saudi Arabia the previous week.

But the only thing that changed was the venue; producers and consumers clung to their respective positions in the debate on what has been behind the dizzying price gains.

Speculation and not oil market fundamentals are to blame for skyrocketing prices, the oil ministers of Saudi Arabia and Qatar said at the World Petroleum Congress in Madrid.

But top oil major bosses from Shell, BP and Repsol disagreed, blaming the surging prices squarely on fundamentals, although Shell chief executive Jeroen van der Veer admitted that there was no current physical shortage of oil.
(8 July 2008)
Original behind paywall.

Analyzing the analysts (Part 1 of 2) – Schwab Forecast Raises Serious Questions @ Wall Street’s Understanding of Oil

Energy Tech Stocks
The problem isn’t that Charles Schwab chief investment strategist Liz Ann Sonders has concluded that oil prices are in a “bubble” that is going to burst. The problem is in how she arrived at that conclusion. Her methodology raises serious questions about Wall Street’s ability to analyze oil at a time when every investment decision in the world is affected by the crisis in oil.

If a 2006 Bloomberg survey of oil experts is any indication, Wall Street already is handicapped by faulty intelligence provided by the so-called professionals. The Bloomberg survey found that most professionals were expecting oil to fall to $56 a barrel in 2008, less than half its current price.

Still, Sonders’ analysis suggests that the Street may now be trying to analyze oil the same way it analyzes stocks.
(9 July 2008)

Oil: the new reality

David Wyss, Business Week via MSNBC
As demand continues to increase, how will the U.S., Asia, and Europe cope with sustained high oil prices? S&P takes a look

Rising oil prices are pinching the wallets of consumers worldwide. And although oil may be in for some short-term drops, most experts agree that the days of cheap gasoline are gone and prices will continue to climb steeply over the long term. Can oil production keep up with rising demand, particularly from India and China? And will alternatives be available before it’s too late? With so many questions, and so few answers, the only thing there’s no shortage of is uncertainty
(8 July 2008)