Monday, July 6, 2009

Crude Speculation

Last week, as crude prices began to fall, the value of Brent dropped beneath both WTI Cushing and New York Mercantile Exchange Crude Futures. Brent normally leads NYMEX Light Crude by about a dollar. Its drop beneath the valuation of NYMEX Light Crude likely indicates – as it indicated last year – a continuing, downward trend for the price of oil. Such a trend is unlikely to bottom out until NYMEX Light Crude is again valued beneath Brent.

That the price of Crude is falling is not particularly surprising. Crude’s upward price trend since the beginning of the year has occurred generally without substantiation in market fundamentals. Demand remains weak and supply remains sufficient. While long-term economic fears at the beginning of the year likely depressed crude below its natural price, it has become over-valued in recent weeks. The most probable explanation for the overvaluation of crude is that it has once again become an investment vehicle, as it did in 2006-2008, its price inflated by speculation.

1 comment:

Colin said...

My guess is that people are investing in oil as a hedge against inflation. There does seem to be a correlation between gold and oil:

http://stockcharts.com/charts/gallery.html?$XAU

http://stockcharts.com/charts/gallery.html?$WTIC