Now that it seems every last bank, analyst, and pundit has lined up behind the peak oil scenario, Lehman Brothers explains why oil is a bubble about to burst (WSJ).
The Dot-Com Bubble Parallels:
Lehman Brothers on Friday compared the rally to the one-upmanship of the dot-com boom: Wall Street analysts have repeatedly raised their price forecasts as oil prices have soared, driving new investor flows that have pushed prices to still-higher levels, leading to still-higher price forecasts. Lehman sees the “classic ingredients of an asset bubble,” with financial investors driven by a “herd” instinct and chasing past performance.
The Strengthening Dollar:
Economists who have cited the dollar’s fall as a key factor in the rising price of oil now argue that that linkage is set to reverse. With the dollar now showing signs of strength, and the fears of inflation ebbing, oil prices also should fall, they say. Federal Reserve Chairman Ben Bernanke’s comment Tuesday that further interest-rate cuts are unlikely gave the dollar another upward jolt.
Increased Institutional Investor Activity:
To back its dot-com analogy, Lehman Brothers cites evidence that institutional investors, including sovereign-wealth funds, have been increasing their exposure to commodities. The investment house calculates that from January 2006 to mid-April 2008, more than $90 billion of incremental investor flows was devoted to assets under management by commodity indexes. It said for every $100 million in new inflows, the price of West Texas Intermediate, the U.S. benchmark, increased by 1.6%. [Argument here is that this has artificially boosted futures prices, encouraging oil producers to hoard crude because they can sell it for more later.]
Supply-Demand Balance Will Change:
New Saudi oil production should come onstream soon, as well as big new refineries that will ease bottlenecks and bring greater competition in oil-products markets. Russia is enacting tax breaks that many hope will lift stagnant oil production.
Meanwhile, oil-demand growth is expected to ease in fuel-hungry China, as the economic slowdown in its Western export markets takes hold. China also has been stockpiling fuel in the run-up to the Olympics, and with the Games over, imports might slow.
All this could “set the stage for a significant correction” in the oil price, says Michael Waldron, an analyst with Lehman. Yet even he predicts that may not happen before the end of the year.
Of course, if even the most bearish analyst can’t see oil abating until next year, that economic recovery may need to be put on hold. On the other hand…the global consensus that we’re stuck with at least $125 oil until at least next year is about the most bearish data point on oil we’ve ever heard.