"Fantasy Economy" Tries to Drive Oil Rally

Oil watchers, buoyed by the optimism displayed by US President Obama in recent public statements, have begun laying the groundwork for a huge rally in world oil markets.

Once economies start growing again -- Moody's Investors Service expects the turnaround to start in early 2010 -- supply won't be able to come on line fast enough to meet demand. That mismatch suggests energy prices are poised to begin spiking again....

....This is sparking early enthusiasm for oil, natural gas, industrial metals, and in some cases, even food. Lately the business press has been rife with fresh reports of hedge fund managers and other investors still holding money staking new positions in commodities. Such outside investors were a key factor in driving up demand for energy investments during the record bull run of 2007 and early 2008. _NYT

Conventional wisdom among oil traders is that lower oil production will not be able to keep up with a rebounding demand for oil that is bound to occur over the next several months. Economic projections from both US and Chinese governments suggest that late 2009 and early 2010 will see both economies beginning to bounce back. Are such expectations realistic? Or is this an example of yet another attempt to create a demand bubble where no demand truly exists?

U.S. inventories continue to expand, but many analysts are forecasting tight supplies in the future as economies stabilize, and the world works off its surplus of crude.

A plunge in oil exploration will make it even tougher to quench the world's appetite for petroleum in the future, experts said.

"But that's still several years away," said Andrew Lipow, president of Lipow Oil Associates. By cutting so much production, OPEC and other oil producers have the ability to meet even a huge jump in demand, he said.

Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore, predicted that oil will be capped around $55 a barrel, and could fall as low as $43 a barrel, over the next two weeks if other countries release more gloomy economic data as expected.

Japan, which said exports plunged by nearly half in February, will release a quarterly business sentiment survey called the "tankan" next Wednesday that experts say is likely to be quite gloomy.

"Japan is the world's third-largest oil consumer, and the tankan is expected to drop to a 30-year low," Moltke-Leth said. "I see more demand destruction down the way." _AP

Demand destruction is what happens when prices are artificially raised above what market fundamentals can support. It is what happened in the summer of 2008, when oil markets were driven insane by traders fleeing a collapsing housing market, looking to preserve wealth that was evaporating before their eyes. Naturally, their efforts led to an even worse collapse.

What can we expect from oil markets (and the economy at large?)

Crude oil futures fell Friday in Asia as traders opted to take profit amid lingering uncertainty if the recent price upswing can be sustained in the face of weak fundamentals.

Oil prices, up nearly 22% so far this year, have climbed steadily in the past week as market participants assumed the key U.S. economy could recover sooner than previously thought, potentially shoring up growth elsewhere and in turn lead to a rebound in global energy demand. _WSJ

Why would "market participants assume" that the US economy could recover sooner than previously thought? Why would they try to drive up prices ahead of any recovery -- when anyone capable of understanding supply and demand could see the inevitable demand destruction such an artificial oil boom would create? For three reasons:

1. They have no understanding of how healthy economies work
2. Wishful thinking is a powerful driver of assumptions
3. Government spokespersons are given far more credibility than warranted

How can I, Al Fin, say that many persons who make a living in capital markets fail to understand how healthy economies work? How indeed! As for wishful thinking, you can't blame a trader for wanting to make money. Certainly the media is largely responsible for the widespread pathological lack of skepticism in US government pronouncements.

Mr. Obama and his gang are running a "fantasy economy" game, much like "fantasy football" except far less believable -- if not for billions of dollars of free media support given to the reich by an adoring circle jerk press.

Obama has always assumed that capitalists would pull the economy out of the recession, regardless of how deeply the clown president's policies rutted the economy. He has no idea how the economy could be revived, but he assumes that someone must know. Obama is, after all, just the commander in chief. It is up to the lower-downs to puzzle out the details. Obama must keep the big picture in mind. The fantasy economy big picture. It has gotten him this far.

This posting is an expansion on an earlier post at abu al-fin