A slowing economy and massive government intervention and the price of WTI oil and gas for cars is still near a 3-year high. What gives?
Unlike past bubble pricing in financial assets, crude oil futures potentially have an element of reality to them because arbitrage opportunities exist between notional and delivery pricing when spreads get too wide. Within this context, consider the long term trend. WTI futures reached a peak of $145/barrel in 2008 before plunging to $45/barrel, traded mostly above $80/barrel since June 2009, above $90/barrel since December 2010, and above $100/barrel from February through mid-June of this year. Crude oil is in the midst of a multi-year bull market based on fundamentals. Unlike past bubble pricing in financial assets, crude oil futures potentially have an element of reality to them because arbitrage opportunities exist between notional and delivery pricing when spreads get too wide. Within this context, consider the long term trend. WTI futures reached a peak of $145/barrel in 2008 before plunging to $45/barrel, traded mostly above $80/barrel since June 2009, above $90/barrel since December 2010, and above $100/barrel from February through mid-June of this year. Crude oil is in the midst of a multi-year bull market based on fundamentals.
The math: $100 in the price of crude WTI = approximately $1.30 per liter (average across Canada)
From our seat, the regional market gears are working smoothly. The globe is still short to the tune of 1.0-1.5 million barrels per day and no new meaningful supply will be added before 2015, as we forecast it.”
Desperate times call for desperate measures.
The marketplace is implying that a price range of $95 to $130/barrel is where supply meets demand (WTI & Brent) at the current level of global base money. This implies a price of car gas of $1.30 to $1.75 per liter.
If one wants to blame financial markets for higher gas prices at the pump then one should blame high levels of overall market sponsorship, which derives directly from high levels of investor leverage, which in turn is generated directly by banks through their lending and prime brokerage divisions, which ultimately derives from easy global monetary conditions.
So we think that the global marketplace for crude oil is naturally biased to trend towards pricing that global policy makers find problematic (too high vis-à-vis wages), and that global policy makers are desperately applying short-term fixes. They will lose. The marketplace reigns supreme over time whether or not there is temporary froth in futures markets.
Excerpts and quotes from: Lee Quaintance & Paul Brodsky
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