OPEC’s latest meeting had as much of an effect on oil prices as Vikram Pandit’s emergency town hall had on the price of Citi (C) shares. In other words, things only got worse.
At this point, the fall in oil prices is so severe that there can be only one explanation: market manipulation by short sellers. Just like what we saw in the financial stocks.
Let’s weigh the evidence:
Look at the charts. The fall has been so severe — it’s basically a straight down line — that there’s no way this price action could be the result of rational markets. Sure, assets should go down, but when it’s that fast and disorderly, there must be external factors at play
The price makes no sense. Oil delivered a year from now is selling for so much more than oil is today, that traders are actually buying oil, renting out barges, and then just storing it for a year so they can make a profit. In a rational market, this shouldn’t work.
The price makes no sense II. Look at all these fancy models we have. This chart of Hubbert’s Peak (AKA Peak Oil), for example, PROVES that we’re on the downslope of global production and that prices should be rising! If only we could just mark oil prices to model, then the price wouldn’t be plummeting like this
A billion cars in China. Sure, the Chinese economy has slowed down, but remember those billion cars on the road? The decline in economic activity that oil prices are forecasting is just totally unrealistic. Short sellers must be at play here, because the free market would never arrive at this price alone.
Ok, now at this point you’re thinking that this is different from a financial stock. After all, a decline in a financial company’s shares can permanently damage the underlying business, but there’s no harm in letting oil prices fall like this. Au contraire!
For one thing, the fall in oil prices is hurting the long-term prospects of alternative energy. This may even be the grand purpose behind the push down — is there a conspiracy to hurt alternative energy? What’s more, the decline in oil prices is causing oil companies to stop exploring. This could be a disaster down the road once the economy picks up. Especially hurt by the decline are the Canadian oil sands, which may go bankrupt without a rational market price of, say, $80/barrel. Since the Canadian oil sands are the future of carbon fuels, we can’t allow these projects to collapse like this.
In normal times, the market is the best way to set prices. But in extreme times when the market stops behaving orderly and the prices make no sense, the government must, unfortunately, intervene. The first step is a ban, or at least an uptick rule, on shorting oil.