Bloomberg Survey Indicates Most Analysts Wrong about Interpretation of Crude Inventory Increase
Disruption of Iranian Oil Production Would be Catastrophic; Crude Inventories would be Irrelevant as Prices Surge to over $100 a Barrel
According to the Bloomberg News survey, "Crude oil may fall on speculation that surging inventories will reduce the impact of a possible disruption to Iranian exports..." The analysts surveyed who truly believe this are wrong. First of all, if there is a disruption to Iranian oil exports then crude oil will no doubt climb to over $80 a barrel within a week of the event. The status of oil inventories being either at normal levels or above normal levels will have no bearing on the panic that will send the price of crude oil higher.
It truly is amazing how college "educated" analysts fail to understand and interpret the true significance of rising crude oil inventories. Probably most of these professional investment "wizards" were too young to remember the oil shocks of 1973-74 and 1979-80. During these times the oil industry did in fact keep extra crude oil inventories as insurance against not only possible disruptions of future crude oil shipments but also as a way to lock in the current price of oil and hedge against future price increases.
A look back at the oil shock of 1979-80 is in order. During this time the crisis in Iran precipitated a 4% decrease in worldwide oil production. The price of oil more than doubled in a matter of weeks. Fast forward to 2006. Iran still controls over 4% of worldwide oil production. What would happen if 4% of worldwide oil production is taken off the market? The U.S. government conducted a computer simulation appropriately called, "Oil Shockwave."
*In Oil Shockwave, a roughly 4% global shortfall in daily supply, results in a 177% increase in the price of oil (from $58 to $161 per barrel.)
The added crude inventories maintained by the oil industry will only act as insurance against potential supply disruptions and as a hedge against increasing crude oil prices by allowing continuous production and increased margins in the short term. The increased inventories should be a signal to the world that the oil industry expects crude oil prices in the future to be higher than current prices. The oil industry maintained higher oil inventories in the 1970's because they expected higher future oil prices. They were correct then. They will be correct again in 2006. The actual increased inventories, however, will have no impact on reducing the panic that will grip the market when Iran takes their 4% of worldwide production off the market.
Disruption of Iranian Oil Production Would be Catastrophic; Crude Inventories would be Irrelevant as Prices Surge to over $100 a Barrel
According to the Bloomberg News survey, "Crude oil may fall on speculation that surging inventories will reduce the impact of a possible disruption to Iranian exports..." The analysts surveyed who truly believe this are wrong. First of all, if there is a disruption to Iranian oil exports then crude oil will no doubt climb to over $80 a barrel within a week of the event. The status of oil inventories being either at normal levels or above normal levels will have no bearing on the panic that will send the price of crude oil higher.
It truly is amazing how college "educated" analysts fail to understand and interpret the true significance of rising crude oil inventories. Probably most of these professional investment "wizards" were too young to remember the oil shocks of 1973-74 and 1979-80. During these times the oil industry did in fact keep extra crude oil inventories as insurance against not only possible disruptions of future crude oil shipments but also as a way to lock in the current price of oil and hedge against future price increases.
A look back at the oil shock of 1979-80 is in order. During this time the crisis in Iran precipitated a 4% decrease in worldwide oil production. The price of oil more than doubled in a matter of weeks. Fast forward to 2006. Iran still controls over 4% of worldwide oil production. What would happen if 4% of worldwide oil production is taken off the market? The U.S. government conducted a computer simulation appropriately called, "Oil Shockwave."
*In Oil Shockwave, a roughly 4% global shortfall in daily supply, results in a 177% increase in the price of oil (from $58 to $161 per barrel.)
The added crude inventories maintained by the oil industry will only act as insurance against potential supply disruptions and as a hedge against increasing crude oil prices by allowing continuous production and increased margins in the short term. The increased inventories should be a signal to the world that the oil industry expects crude oil prices in the future to be higher than current prices. The oil industry maintained higher oil inventories in the 1970's because they expected higher future oil prices. They were correct then. They will be correct again in 2006. The actual increased inventories, however, will have no impact on reducing the panic that will grip the market when Iran takes their 4% of worldwide production off the market.
posted by -Aztec- at 8:32 AM
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