Monday, September 24, 2012

Oil Prices

The above shows oil prices (WTI and Brent on the left scale, and the spread between them on the right scale).

Oil prices continue to seem driven a lot by news flow, with much of that being general economic optimism and pessimism.  For example the structure of prices in 2012 with a peak in March, a trough in June, and then rising prices since, is not that different from that of the S&P 500:

In turn this probably mainly represents increasing pessimism about Europe in the late spring and early summer, followed by increasing optimism as the possibility of greater action by the ECB to back peripheral bonds made a catastrophic resolution of the European crisis appear less likely.

At any rate, oil remains near $120 for Brent and $100 for WTI, despite a pretty weak global economy, suggesting that increasing the supply remains hard work.


porsena said...

I thought of this post as I read an article in today's Financial Times.

The reporter describes a conversation with "a senior official from a medium-sized Opec country, with decades of experience in the oil market". The official points out that, because the fed's interest rate is low and his country already has significant foreign exchange reserves in US Treasuries, the opportunity cost of leaving oil in the ground is low. This results in little pressure to increase production to lower oil prices.

Stuart Staniford said...

Porsena: the officials position only makes sense if he is assuming that prices are unlikely to fall again in the future. After all, if that were to happen, he'd have been a lot better off in treasuries, low interest rate or no. (I share his assumption but just wanted to point out that there is a whole worldview that is not called out in the article but is in fact a prerequisite for the reasoning).