Loading...
Symbols:
Authors:

Analyst: Oil Prices Inflated by 50%

by: Hard Assets Investor September 17, 2008 | about stocks: DBO / OIL / USL / USO    
Hard Assets Investor

Hard Assets Investor

From HAI:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Mike Norman, anchor, HardAssetsInvestor.com (Norman):
Today my guest is Fidel Gheit, managing director of Oil and Gas Research at Oppenheimer.

Fidel, you follow the oil markets and the energy markets obviously very, very closely. Let's talk about the period we're in right now. Obviously we saw a huge run-up in the first seven months of this year, culminating at almost $150 a barrel in mid-July. Now we've had a very big price decline, almost at 30%. What is behind it, in your opinion?

Fidel Gheit, managing director of Oil and Gas Research, Oppenheimer and Co. (Gheit): Well, to start with, the $148/barrel peak was an artificial peak because oil prices had been surging on really no changes in supply-and-demand fundamentals. They'd been driven by speculation, the fear of potential supply disruption and all these things. Nothing obviously happened; we had plenty of supply. Demand has been coming down in the U.S. and slowing down in China, India and elsewhere. So all of a sudden, the idea of oil shortages has not obviously panned out, and traders look the other way, and that's why the oil price is lower.

Norman: Let's talk a little bit about that speculation aspect. There were revelations recently that back in mid-July, just about the time of the price peak, the CFTC discovered a very large trader that had been misclassified as a hedging firm. The trader happened to be a commercial firm where their positions were enormous. They comprised or accounted for something like 30% of all the NYMEX open interests. Perhaps this was a trigger to the sell-off.

Gheit: That's part of it, and we've seen a lot of other hedge funds that were focused on commodities in general. One of them went out of business a couple of days ago, and there are rumors that there are more to follow. Basically these people were making huge bets, and it was fine as long as you are on the right side of the call, but then it hurts pretty badly if you are wrong, and they have been wrong.

Norman: They have been. Now, is the game over for these guys in the sense that there's too much scrutiny on them now? If they were a factor in the run-up to this $150/barrel peak - a huge number - are they out now for good, or are they out just because they've been scared out for the moment?

Gheit: They are only scared out for the moment. These people will always come back. This is like, you know, "I'm smarter than the other guy, he got caught, and I'm not going to get caught."

Guess what? You're going to get caught and somebody else will think that they're smarter than you are and will be trying the same thing again.

Commodities humble everybody, from the larger companies to oil-producing countries to everybody else. Nobody would contradict commodity prices worldwide. There are political factors obviously. There are so many moving parts that people can pontificate as if there were going to be $148/barrel oil by July 15 and then going to be $205/barrel oil by March 16. That's total nonsense.

Norman: Let's talk about regulation, because just prior to this discovery of this huge trader in there holding a very large position, Congress was discussing and there were a number of bills in Congress that were focused on dealing maybe with speculative position limits, etc. But nothing came of it. But some lawmakers said they're going to pick this up again now in September. Do you think anything will happen in terms of maybe putting some limits on it?

Gheit: I do believe that a new president in the White House, whether Democrat or Republican, is not going to put up with the nonsense that has been going on for the last five or six years.

Norman: Even if prices stay down?

Gheit: Even if prices stay down. I still believe that oil prices are inflated by as much as 50%. 50 percent of the oil price that you see right now is all fraud; it's not for real.

Norman: Wow. So the folks who say "Well, you know, speculation works both ways because now they're selling it," we shouldn't really be happy because it's still too high, right?

Gheit: I explain to people that you can have the same number of passengers that are in a boat, but if you go to one side of the boat, the boat will capsize, OK? And that's what happened. Speculators tend to basically amplify, whether they move up or they move down, and they are making a bet that's a self-fulfilling prophecy. At the end of the day, somebody will pay for it, and unfortunately the consumers will pay for it.

Norman: And they have been.

Stay tuned next week for the second half of my interview with Fidel Gheit. We will be discussing the geopolitical outlook, and he'll be giving up a price forecast. 

Related Articles

This article has 20 comments:

  •  
    Sep 17 11:44 AM
    The first name is Fadel, not Fidel.

    Fadel is of course right. Oil prices will most likely fall much further. Financial speculators probably still hold more than 80B $ speculative long postions in various oil futures markets. If, under the next Administration, the CFTC has to get serious in observing position limits for financial speculators, there will be a blood bath.
    Reply
  •  
    Sep 17 11:52 AM
    At least 70% of the increase of Oil prices since 2000 can be accounted for by the US Dollar depreciation. Yet your guest doesn't even mention the impact of the US Dollar on Oil and commodities prices in general. The recent decline of the Oil price has occurred synchronously with a sharp rise of the US Dollar.

    Claude
    Reply
  •  
    Sep 17 12:05 PM
    Gheit has been wrong more than he has been right for the past three years, and Norman is usually an over-reactive talking head.
    We simply have seen demand destruction with $4 gasoline and the dollar valuation has also had some impact.
    Oil prices will remain volatile in the next decade while switching to other energy sources. Playing the oil sector is only for the strong.
    Any minor supply disruption can turn this market completely.
    Reply
  •  
    Sep 17 12:14 PM
    don't know what the price was when that interview was made but cannot agree to the 50% statement base on, say, a $100/bbl price. oil production cost inflation and opec countries' budget inflation as well as expensive tar sands and to some extent biofuels becoming an important supply source have brought up the cost floor to not much lower than we are right now, say $80-90, below that, KSA and tar sands output will react quite significantly.
    Reply
  •  
    Sep 17 12:18 PM
    would take anything Norman says with a grain of salt. just another pessimistic big mouth with a fancy hairdo and too much makeup.
    Reply
  •  
    Sep 17 12:35 PM
    Everyone loves to say "I told you so" when things turn in their favor, especially during volatile weeks on the market.
    Reply
  •  
    Sep 17 12:39 PM
    When oil was $147 there were plenty of analysts who said it will go up $200 and beyond. They offered proves based on fundamentals and other reliable sources.

    Now, as oil drops insanely, there is a group of analysts saying oil is overinflated and it will drop another x%. I wonder how many analysts in the second group belonged to the first group a few months back?
    Reply
  •  
    Sep 17 04:47 PM
    Mini Me:

    I think you got it about right.


    I guess with so much volatility in the financial markets, every financial whack job out there needs to predict that everything is either going to go up 50% or down 50%.

    Personally I believe those who say the fair market price in the absence of speculation is probably in the 90-115 range.
    Reply
  •  
    Sep 17 05:00 PM
    I concur with Claude's observation that the price of oil is tied directly to the perceived value of the US dollar. If someone has a graph that shows the correlation, or lack thereof, I'd appreciate if you would share it with
    SA readers.
    Reply
  •  
    Sep 17 05:13 PM
    If do not count politics, opec, in investigation how much oil really should cost, Fadel right. But in deed its all about huge speculators. And you can explain anyhow when prices surging or falling. They are under specultaors conrol thats why forget about demand, supply and bla bla bla.
    Reply
  •  
    Sep 17 11:12 PM
    Congratulations to Fidel for being the ultimate realist. Sees a downtrend in oil for what it is. More importantly, he brushes aside "fundamentals&quo... written in countless books and articles about "Peak Oil", that the marginal cost of production is usd80-90 per barrel; he focusses on the relevant dynamics behind prices and now it is a group of powerful players behind it that drove prices up. Speculative forces may reverse and drive it down. I like the realistic approach as opposed to books full of this and that, peak oil, insatiable emerging market demand etc etc.
    Reply
  •  
    Sep 18 02:04 AM
    Well, now that speculartors have gone, so as your gasoline. Refiners are the biggest losers on the speculator blame-game. I feel no sorry for your guys paying $4+ a gallon. See what Petro Canada just said about the costs their oil sand projects. It's true the current barrel is cheaply produced but tomorrow's oil is the problem. I'm sorry, Wall Street does not look beyond one week, at best the next quarter.
    Reply
  •  
    Sep 18 05:40 AM
    wowo, 50% overvalued. based on what argument/data? adding reserves, pumping and transporting them does certainly cost more than 45-50$/bl. Of copurse, not in the gulf states but pretty everywehere else. at $50 a lot of marginal supply gets killed instantly. and these are the guys who matter. except of you believe that the saudis can pump any amount they want to pump. and that they would do so especially at $50/bl. Sorry, but people like Simmons are way more credible with thgeir arguments than this guy who just makes a silly prediction. can oil fall to 40-50$? of course, short term, on speculation and liquidation. but not for long. the big oil majord won't supply it at that price. why should they? they have enough cash now to survive even with shutting down half of their production.
    The guy has absolutely not understood the siemic shift that has taken place: from valuing oil at todays production costs versus total replacment costs
    Reply
  •  
    Sep 18 06:05 AM
    I listen to Norman on a local business radio station (with the volume really low). The entire way up on oil, he kept saying speculators weren't the problem and even if they were, they make the markets function more smoothly and don't bid up prices.

    Norman calls himself the "Economic Contrarian." He follows the current trends and shouts (yes, really shouts... see below) how smart investors take the contrarian position to win. And then laments why it didn't work on the next few shows.

    Example of a typical Norman rant...

    "Come on, people! We are better off with fiat money than a gold standard. Look how much wealthier everyone is now versus the 30's. You just CAN'T argue that life isn't better. Speculators are a part of a healthy market. What you have to do is learn to spot the peaks and take the contrarian position in the trade."

    On and on, same logic: take what's working, flip it, and label it "contrarian" investing.

    Incidentally, he appears to be honest with his investing gaffs. He's said on air that he's been buying financial stocks all year long.

    Yes, just as said above - talking head with pretty hair and too much make up.
    Reply
  •  
    Sep 18 12:19 PM
    Why is it that none of the oil Bears, who claim that this is all "speculation"... seem to be able to offer any substantive, fundamental arguments either? Come on -- Is a boat analogy supposed to be a compelling argument about oil supply and demand?

    This is all testament to the rarely-discussed fact that we know very little about oil reserves and production, particularly in Saudi Arabia. We can listen to Hard Assets Investor and Jim Cramer tell us every day that its "not about supply disruptions, its about demand"... but the 1970s proved that supply disruptions can cause HUGE problems.

    To deny that we face the same risks in the oil supply chain - or worse risks - as we did in the 1970s, is simply ignoring reality.

    One terrorist attack on Saudi oil production will show the world how much at-risk our oil supplies are.

    In this environment, as long as nothing goes wrong - a huge assumption - sure, oil prices may moderate. But then when a "surprise" event occurs - an act of war, terrorism, or God - all the oil Bears will say "well, no one could have predicted THAT!" But of course, its funny how unpredictable things always seem to happen.

    And when those things do happen - Democrats will lament their opposition to coal and nuclear, Republicans will lament their opposition to longer-term alternative energy sources, and the country will lament its fixation on electric cars without any concern for how that electricity can be produced over the next ten years. And Vinod Khosla's utterly fraudulent claims about "cellulosic ethanol for $1 a gallon" will be revealed for the self-serving hype that they are.
    Reply
  •  
    Sep 18 12:19 PM
    Why is it that none of the oil Bears, who claim that this is all "speculation"... seem to be able to offer any substantive, fundamental arguments either? Come on -- Is a boat analogy supposed to be a compelling argument about oil supply and demand?

    This is all testament to the rarely-discussed fact that we know very little about oil reserves and production, particularly in Saudi Arabia. We can listen to Hard Assets Investor and Jim Cramer tell us every day that its "not about supply disruptions, its about demand"... but the 1970s proved that supply disruptions can cause HUGE problems.

    To deny that we face the same risks in the oil supply chain - or worse risks - as we did in the 1970s, is simply ignoring reality.

    One terrorist attack on Saudi oil production will show the world how much at-risk our oil supplies are.

    In this environment, as long as nothing goes wrong - a huge assumption - sure, oil prices may moderate. But then when a "surprise" event occurs - an act of war, terrorism, or God - all the oil Bears will say "well, no one could have predicted THAT!" But of course, its funny how unpredictable things always seem to happen.

    And when those things do happen - Democrats will lament their opposition to coal and nuclear, Republicans will lament their opposition to longer-term alternative energy sources, and the country will lament its fixation on electric cars without any concern for how that electricity can be produced over the next ten years. And Vinod Khosla's utterly fraudulent claims about "cellulosic ethanol for $1 a gallon" will be revealed for the self-serving hype that they are.
    Reply
  •  
    Sep 18 02:01 PM
    Interesting interview, with some interesting comments - or perhaps I should say that the comments are much more interesting than the interview, which although interesting is practically worthless from the point of view of economic and finance market logic. And here I am thinking in particular of the first observation of Mr Gheit. He apparently knows almost as much about speculation as I do about brain surgery. Yes, speculation in the paper market can move the price of physical oil by changing expectations, but not to the extent that the price of physical oil has moved over the last year or so.

    Ferdinand E. Banks (aka Fred)
    Reply
  •  
    Sep 19 12:26 AM
    A global slowdown with accompanying demand destruction has driven WTI below $100. I would assume a Global Depression could drive WTI down another 50%.
    Reply
  •  
    Sep 19 01:22 PM
    Such a man. He might be correct, but only in the short run, Is that all that matters in his world?
    Reply
  •  
    Oct 05 05:04 PM
    Keep in mind this is the same Mike Norman saying at various times that housing was fine, freddie and fannie were fine, financials were a great buy, the economy was booming, etc.

    Even a blind squirrel sometimes finds an acorn. Oil has fallen some since this.
    Reply
More Comments on DBO »
More by Hard Assets Investor

Investment Resources
Money Management 

Research 

Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Interviews 

Oil Price 

Alternative Energy 

Coal