Oil crisis is a desperate cry for capital

If this were merely a financial casino, the odds on an eight-year winning streak are too long. The speculators bet correctly on rising demand in China and India and they then correctly assessed that investment by oil companies had been too little for too long to satisfy rising demand for crude. Their third and final bet has been that oil nationalism would curb access to more crude and prevent new investment.

All three bets have paid off . What we have been seeing over the past three years is a massive reallocation of capital from oil-consumer countries to oil-producing countries. The dollars have been sucked out of the pocket of the motorist and exported to the Gulf, where they are needed.
Before 2000 the oil industry had struggled through two decades of investment famine. Infrastructure was rusting — the evidence all too visible in fires in Texas, leaks in Alaska and a weak supply response from Opec.

If you want bubbles, look at the dotcom boom and the telecoms and media hysteria. The oil price escalation is nothing more than a desperate cry for capital — oil producers need cash and the sound of ripping and tearing in Western markets is the sound of money moving into profitable investments.

Short-sellers have been active, too, increasing their exposure by 8% over the past month, about 74 million barrels. They can smell the sickness of the US economy. It is not just the shrieks from falling Wall Street bankers — it is weakening US demand. Product deliveries by US refiners are sharply down since the beginning of the year .

But it is not the crude price over the next three months or even a year that matters, argues Jeff Currie, of Goldman Sachs. If you want to understand where oil might be going, look at the long end of the crude futures market.

Look to 2010, 2011 and 2012 and the crude price is virtually unchanged at 100 a barrel. The market seems to be saying there is a strong likelihood that demand will remain strong and that the world’s ability to supply it will remain restricted.

The Times (S-Af)