$100 Oil and the Impending Crunch
It's that time of year again - the 1929 Wall Street Crash occured in the last week of October, as did 'Black Monday' in 1987. Already today, stockmarkets have begun to tumble, and the NYSE isn't even open yet. I don't pretend to understand economics, but I do know that oil at an incredible $90 per barrel, jitters on the trading floors down to the subprime credit crisis, geopolitical uncertainties over Iran and Iraq (it looks like the Turks will attack some time this week) and a general sense of doom will probably trigger another slump.
Commodities | Material world | Economist.com
Individual commodity prices are still highly volatile thanks to speculative demand. A sharp rise tends to attract “momentum” investors, who push prices up even further until end users start looking for alternatives. At that point, the momentum buyers retreat. But oil's attractions to investors have increased recently because the market has moved into “backwardation”, where futures prices are lower than the current price. Investors can thus earn a “roll yield” by buying the future and waiting for the price to rise to the spot level.
The key factor, however, is the tightness of supply. Francisco Blanch of Merrill Lynch reckons that supply contracted by 500,000 barrels a day in the third quarter while leading economic nations entered the fourth quarter with their lowest stocks for four years. Mr Blanch reckons it would not take much to push the price to $100 a barrel. If it gets there, stockmarkets may face an interesting test of confidence.
