Energy 2030

Organizing Committee

Final Program

Poster Exhibition Venue 2006 Proceedings


Proceedings of the Second International Energy 2030 Conference,
November 4-5, 2008, Abu Dhabi, U.A.E.

Oil Market Stability in Times of Fear and Greed

Dalton Garis

The Petroleum Institute, UAE

According to energy industry professionals there is no shortage of oil and high current prices are not justified by the fundamentals of supply and demand, which would indicate a price in the mid $40.00 range. But with the reduction of world surplus production capacity from over 6 mbd to less than 1 mbd, it can be argued that markets care less about fundamental realities and far more about psychological factors—fear and greed, and this is pushing up the price of oil. Restated, actual supplies are not at issue; expectations of future difficulties in production and possible supply chain disruptions are driving prices up or down.

Oil supplies experience extremely long supply chains, making the current price less a reflection of current realities and more of future expectations. This is less true when oil is plentiful and a generous production surplus is on hand for any disruptions, and truer when the daily oil balance—a measure of excess capacity—becomes small enough so that any disruption might threaten future oil supplies at current prices. Note the phrase, “at current prices.” It is not being argued that oil would not actually be supplied to markets during these supply disruptions, only that they would accelerate price rises, since getting the oil to those who want it would then become more expensive.

Crude oil market behavior has therefore shifted after 2003-2004 when the oil balance became small and prices began rising from being grounded and motivated by supply-demand relationship analytics to reaction behavior analytics among market users. This is why crude prices have become hypersensitive to news and rumors. It is not being argued that crude oil cash and futures are becoming more volatile. But if prices are not exactly volatile their primary characteristic is certainly instability, with price runs up or down possible at any time. And, the instability has increased since 2004.

Under these circumstances markets focus on the actions and reactions of traders themselves—how traders are likely to react to a specific bit of news, and less to the news themselves. If this were not the case, technical analysis—price charting—would be a useless enterprise with no forecasting capacity whatsoever. But it does have this capacity, precisely and solely because traders are likely to trade on its signals, thus verifying the forecast. This and similar behavior, leads to unstable market conditions because of the increased likelihood of behavior cascades and highly correlated thinking among market participants. Indeed, the abandonment of supply-demand analysis in favor of reactionary analysis leads to increased correlative reactions, as everyone either sells or buys at predetermined signals having nothing to do with the realities of oil supply and demand.


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