Speculative Bubble To Burst: Oil Prices Will Return To Reasonable Levels In Next Six Months

Higher oil prices and their impact on the economic recovery have worried analysts during the last weeks, but on the floor of the New York Stock Exchange traders are confident that this trend will end in the next six months.

“We will get to a more realistic price in gold and oil within the next six months,” said Peter Costa, president of Empire Executions.

For Costa, speculation has played a big part in the last spike in crude oil prices, accounting for between 10 and 12 per cent of the run-up. “When this speculative bubble bursts, we will come back to more realistic levels,” since speculators are here just to make money and run, he said.

“This trend won’t last long term,” he added.

That said, the current situation with oil prices hovering just above $100, has not been bearish for the stock market and this situation could be sustainable as long as the oil prices do nothing more than just trend around that number. Ultimately, based on what is happening in Libya and other countries in the Middle East, analysts from Bank of America Merrill Lynch expect Brent crude oil prices to approach $108 a barrel (up from $88) and WTI to go as high as $101 (up from $87) on average for 2011.

Some experts expect some companies to talk about possible margin compression as a result of rising commodity prices during the next earnings season. But stock markets still have the underlying strength that followed the rally we had three or four weeks ago and are also waiting for the earnings season around the corner.

“We will see bigger cash positions and that will be very positive for the market,” Costa pointed out. “I don’t know if the earnings are going to surprise that much but cash positions are what’s going to drive the market higher,” he confirmed.

At the end, all these companies, with tremendous cash positions of 30 or 40 per cent of their book value, can’t sit over that much cash for a long period of time without doing something positive: hiring new employees, expanding operations, buying back shares or increasing dividends.

Also, traders like Costa, with more than 27 years of experience on the NYSE floor, expect that between summer and fall, a lot of these companies will engage in a buying and merger frenzy, similar to what we saw a little more than a week ago when AT&T made a $39 billion offer to acquire T-Mobile USA from Deutsche Telekom.

“They can buy a competitor and increase their market shares simply — it is very efficient,” said Costa, adding that sectors such as consumer staples and telecommunications would be the most active inthat area. “Sprint may be not going to be around without a partner or a buyer by the end of the year,” Costa said.

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