BUBBLIN' CRUDE:

Oil: A Bubble, Not a Spike?: Analyst Tim Evans thinks the crude rally isn't justified by fundamentals and expects prices to "fall hard" soon to $26 to $30 a barrel (June Kim, 4/27/05, Business Week)

While the rest of Wall Street just can't seem to get enough of the oil market, energy analyst Tim Evans isn't afraid to go against the tide. Evans, a senior analyst at IFR Energy Services, a division of Thomson Financial, thinks that the current run-up in oil prices is much like the Internet bubble of the late '90s. [...]

Q: Where do you see oil going?

A: [Recently], we saw the highest level of commercial crude oil inventory in the U.S. since June, 2002. Then, we were trading in the range of $26 to $30 per barrel. The current physical fundamentals, not even projecting to a greater surplus down the road, are consistent with a $26 to $30 price.

We first got to $50 at the end of last September after Hurricane Ivan. We've got an all-time high price without a physical shortage.

Q: Then what's driving the uptick in prices?

A: We don't have a physical bull market, but we do have a financial bull market. The measure of the financial market is the open interest on the New York Mercantile Exchange. The futures market is 72% larger than it was 18 months ago. Over that same period, the physical market is maybe 5% larger. What you have on the financial side is a bunch of money being thrown at the energy futures market. It's just pulling in more and more cash. That's the side of the market where we have runaway demand, not on the physical side.

DOE [Energy Dept.] crude inventories have been rising since last September. If demand is outpacing supply, how can inventories rise?

Q: But there's a limited global supply and rising demand in the U.S. and China?

A: First, oil supplies are always finite, and oil reserves are always finite. That's not really headline news.

In terms of rate of growth, world oil demand grew last year by 3.4%. Yes, 3.4% was more yearly growth than we had seen in quite some time. [But] going back to the '50s and '60s, world oil demand during that era was growing an average of 9% per year. We didn't have oil-price shocks then.

Part of our fear really dates back from 1998 and 1999, when we had oil prices down at $12 per barrel. Those prices choked off investment in production capacity. That was the bust part of the cycle, and we're now in the boom part of the cycle. But it's still a cycle. The believers in the long-term steady march to $105 are basically making that it's not a boom-and-bust cycle anymore.

If, as seems the most likely explanation, the President's recent downtick in the polls is almost entirely a function of sticker shock at the gas pump, the what will those polls do when prices plummet? Even though he'll have had nothing to do with the rise or the fall, the goose to his numbers may well help get the remainder of his second term agenda through Congress.

Posted by Orrin Judd at April 27, 2005 9:03 PM