After watching crude oil’s parabolic rise - doubling from a year ago, to above $130 a barrel in May - central bankers who underestimated the power and resiliency of the “crude oil vigilantes” are now praying for this apparent bubble to burst under its own weight, and at a moment’s notice, writes Gary Dorsch of SirChartsALot.com.
In an interview with The Daily Telegraph in London, one of the world’s biggest hedge fund traders, George Soros, said that although the weak US Dollar, depleting supplies from aging oil fields, government fuel subsidies, and record Chinese and Indian demand could explain the surge in energy prices, the crude oil market is also significantly inflated by speculation. “Speculation is increasingly affecting the price, which has a parabolic shape, which is characteristic of bubbles,” said Soros.
However, he also warned that the oil bubble won’t burst until both the US and British economies slipped into recession, after which event, oil prices could fall dramatically. “You can also anticipate that the (oil) bubble will eventually correct, but that is unlikely to happen before the recession actually reduces the demand. The rise in the price of oil and food is going to weigh and aggravate the recession.” It’s dangerous to pick a top in a raging bull market, since bubbles can inflate more than anybody ever imagined.
On May 20th, T.Boone Pickens - the legendary oil trader and investor - told CNBC he expected crude oil prices to keeping going up, even from here. “I think we’ll get to $150 this year,” he reckoned. The next day, soon-to-be deposed Israeli prime minister Ehud Olmert called for a US naval blockade of Iran. If that happens, crude oil could shoot to $200 per barrel.
Soros is expected to tell United States lawmakers on Tuesday that “a bubble in the making” was under way in oil and other commodities and that commodity indices were not a legitimate asset class for institutional investors. Soros sounds alarm on oil and commodities ‘bubble’. According to the report by the Financial Times, Soros is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble. He is expected to tell, “I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” to the Senate commerce committee Soros, according to a draft text seen by the FT. (Rediff/India, The Guardian,UK)