Submitted by William Bonner, Chairman – Bonner & Partners
Nobody Knows Anything
PARIS – What do we know now? We consult the gods… and the dead. On Tuesday, the Dow eked out a 52-point gain, to the relief of investors [ed. note: that was wiped out and then some on Wednesday].
But crude oil continued its historic slide. As of yesterday’s close, a barrel of U.S. crude oil changed hands for just over $31 a barrel. That is a 71% drop from the $107 price tag at the peak of the oil market about 18 months ago.
Crude oil storage tanks… bursting at the seams.
Photo via proteuspetroleum.com
There is so much oil inventory that storage tanks are bursting at the seams. And oil shippers are collecting near-record daily rates, as their tankers are used for storage, as well as for transport.
If inventory holders become forced sellers, as some analysts predict, prices could hit $10 a barrel before this bear market is over. Then inventories will be drained, and today’s lack of investment in new output will send the price up again.
As Bonner & Partners researcher Nick Rokke notes, market prices do not revert to the mean – especially in the commodities sector. Instead, they go to the mean and keep on going. One extreme leads to another equal and opposite extreme…
In our view, the big drop in oil prices is one of the many unforeseen consequences of Fed policy. There are other factors at play, too. But by encouraging U.S. oil producers to borrow at ultra-low interest rates, the Fed exaggerated the usual boom-bust cycle of the commodity markets.#
Cheap credit made it possible to overinvest in production… which made it possible to overproduce… which caused prices to collapse. Others have a different explanation. They believe the low oil price illustrates the foolishness of the “Peak Oil” hypothesis. Continue reading