April 9th, 2011 
Category: 
As I write this, Brent Oil is currently trading at $126 a barrel while WTI is trading at $112.50 a barrel. Believe me; this is not my dream scenario come true as I always reiterated that oil anywhere above $75 or $80 is very profitable for energy companies and comfortably supported by the global economy.
The downside to these prices is consumers spending more of their hard earned money on gas instead of in more useful sectors of the economy. These high prices will also trigger demand destruction as some people choose to drive less or use more public transportation.
Why is oil trading this high? Well it’s not because of Libya’s civil unrest since the lost Libyan production was offset by other OPEC members increasing theirs. While oil prices rise, OPEC does not see a need to hold any special meetings before its scheduled meeting in June. That’s because in OPEC’s view, the market is well supplied.
Then why is Oil so expensive? The UAE Oil Minister Al-Hamli puts it bluntly: “International markets are choosing to ignore market fundamentals and bet on the worse case scenarios.” OPEC still has spare capacity of 4 million barrels per day and inventories are comfortable across the world with high stocks in the US.
Last time oil hit $150 per barrel, we know what came next as it plummeted back down to $40. Is a repeat on the way? Commodity prices are screaming about rising inflation because of a continuously weakening USD. Commodities calling BEN, BEN, are you listening?
Economic roundup:
When Taxes Attack: Forced Out by High Taxes
Toxic Dollar: Why Nobody Seems to Want US Currency
Coxe Sees Turning Point for Markets
Americans to Fed: Prices Are Too High
Canada Weaning Itself Off US Trade
Weekly blog roundup:
Stay at Home Dads and Suga Mamas: When the Woman Becomes the Primary Breadwinner @ Invest it Wisely
You can learn financial planning tips from Guns N’ Roses @ My Own Advisor
Last Minute “Blogging as a Business” Tax Tips @ Young&Thrifty
Reviewing Spring Gardening Goals @101 Centavos
Investing: 3 walls to watch @ BalanceJunkie
6 advantages of dividend investing @ WhatIsDividend
Dividend stocks vs Corporate bonds @ TheDividendGuyBlog
Is Buy And Hold Investing Dead? @MoneyReasons
How To Invest In India @Money Cone
Gold Versus Dividend Stocks @ Dividend Growth Investor
What Motivates You to be Financially Responsible? @ Barbara Friedberg PF
The Lost Decade? @ DIY Investor
My DIY stock portfolio is overweight in Canadian oil producers for a reason. I believe Oil consumption is on the path of growth for the next decade and I intend to take every advantage possible of it:
thx for the mention!
Thanks for the mention, Mich! Apparently OPEC is going to rake in $1 trillion from oil this year? Not too shabby. Question is if they will invest it wisely, or not.
Thanks for the mention. It’s surprising to me that stocks don’t seem at all bothered by rising oil prices – and some of the other things going on.
[...] Beating the Index: Weekend Edition: High Oil Prices Unwarranted [...]
I completely agree about the oil. Traders have factored in an absurd risk premium to the price now. I wrote about a month ago that I thought this would happen and that it would make a run to about $115 before starting to correct. I’m starting to think that it might go even higher than that. Regardless, oil is not trading on fundamentals and is going to correct at some point.
@WiD, You’re Welcome!
@IIW, now that’s what I call money, it’s good to have oil
@DIY, I am surprised as well, this market in its entirety does not make a lot of sense. Let’s see what happens after QE2 ends.
@Dave, absolutely agree with you, it will end up by correcting and I will be happy if it settles in an $75-$90 band.
Imagine the prices we would see if production was actually affected in Saudi Arabia! Despite the economic constraints that oil puts on growth there is an argument that higher oil prices help the economic recovery to some degree. With the amount of taxes governments are able to draw into their coffers the equilibrium with which the economy can absorb higher prices while continuing to grow are valid elements of economic growth. Back to the market, I took my play money out of opc on Friday after jumping 40% on the week. With higher oil prices opc could sustain a couple more quarters before filing for creditor protection. A lot can happen in that time.
CVM is a stock that I remain cautiously optimistic about. I believe phase 3 drugs stand around 44% for approval and the immunotherapy sector, that includes multikine, receives about twice the normal approval ratings of other sectors. Still a gamble but there is some great upside if things work out. Phase 3 can take many years but I believe preliminary results will set the tone for this stock and we could see that within the next 6 months.
http://biotuesdays.com/2011/01/18/cel-sci-on-cusp-of-cancer-game-changer/
Hi Mich-I love when this happens; I stop by one of my favorite sites to see what’s going on, and my site is mentioned; Thank you so much! I’ll probably get my google alert next Thursday
. I really like the article about the uncertainty of oil prices. One thing I know for certain, THE FUTURE IS UNKNOWABLE!
Thanks for the link, Mich.
Who in OPEC has the spare production capacity?
Thanks for the mention, Mich.
Agree with the above speculation from Barbara- we know that the future is uncertain.
I remember a few years back when gas was really expensive, definitely hurts the budget, that’s for sure.
Weimar America: I’ll be delighted to see the prices of commodities go down, but I don’t expect it. That is the irrational view that somehow the excess money supply will not continue to chase goods. I don’t think the price of a barrel of oil is too high. This may simply be the path to well beyond $140 to $200 and higher. But I do expect volatility. So hold onto your hats!
High oil prices is about dollar weakness: Look at what the dollar index is doing (and that is compared to other fiat currencies!): http://www.economicnoise.com/2011/04/10/dollar-collapsing/
See:
http://righteousinvestor.com/tag/Weimar-America/
@JB, nice play on OPC but your CVM is a wildcatter!
Still holding HND?
@Barb, thank you for the kind words, I agree with you that only uncertainty is certain about the future
@101, mostly the gulf countries UAE, KUWAIT, SAUDI and some others I forgot.
@PWD, you hit it on the head, dollar devaluation will push commodities higher! I think I have to get back into a silver stock since this year it might end up hitting $50/oz.
@Y&T, i am glad our car use is limited but we still see an impact on our budget at these levels. Imagine if it was to go even higher!
Mich: here’s another chart which shows that commodities are simply tracking QE (Federal Reserve purchases of debt–the article by Steve McCann is good too): http://www.americanthinker.com/2011/04/silver_and_gold_prices_deliver.html
Well, Ben may not be listening, but the commodities markets are certainly correcting over the last 2 days. I wonder how long that will last.
Thanks for including my article!
@balance, it looks like the correction is over. Printing money continues and off we go again!
[...] Beating the Index [...]
[...] by a recovering world economy. I even mentioned how oil prices were unwarranted back on April 9. With silver falling off the cliff, investors suddenly realized the $30 risk premium no longer made [...]
[...] not kid ourselves, the era of cheap oil is over but we’re not at the stage where $140 oil is warranted and this has been voiced by several OPEC members this [...]