A Closer Look at the Oil Price Spike
James Hamilton at Econbrowser, one of our recommended sites, takes a thoughtful look at oil prices. Examining data from a variety of sources (check out the charts) he notes that there has been a small increase in the production of oil, and excitement about some new reserves.
He urges us to consider oil prices in the context of the increase in other commodity prices. He concludes as follows:
Instead I believe that the price of oil, like the price of all the other storable commodities, and for that matter the dollar cost of a euro, is primarily responding to the Fed’s decision to move the real interest rate strongly into negative territory.
But once again the Fed has a golden opportunity to prove me wrong. Fed funds futures prices currently reflect an expectation that the Fed will make one more cut to 2% at the meeting at the end of this month, and then stay there. Here’s a prediction for you. If the Fed surprises the markets by holding steady at 2.25%, all those commodities will begin to crash within hours of the news.
From a very different perspective, T. Boone Pickens has reversed his prior prediction that oil would move lower, to $90 a barrel by the second quarter. Presenting to a group of Georgetown students he said that he “missed” and has covered his short position. “There are only 85 million barrels of oil in the market every day,” Mr. Pickens added. “I don’t think you can get it above 85 million – lock that number in, and we’ll see if I’m right.” Check out MarketBeat for the entire story.