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By Robert Rapier on Oct 27, 2007 with no responses

100% Manipulation?

Tags: Oil Prices, OPEC

From the Detroit Free Press:

Oil prices go sky-high, but don’t fear $5 gas

If oil prices reach $100 a barrel for the first time, does that mean gasoline will be $5 a gallon?

Analysts say no — gas won’t even hit $4, because oil supplies are good.

This is 100% manipulation by the financial players … and the price of oil at this level isn’t justified by the fundamentals,” said Fadel Gheit, a veteran oil analyst with Oppenheimer & Co. in New York.

Fadel Gheit is probably the most quoted oil analyst in the world, and yet has been consistently wrong on the direction of oil prices for 5 years. It reminds me of Daniel Yergin, who wrote The Prize: The Epic Quest for Oil, Money and Power. Despite a track record of being wrong on the direction of oil prices, he is still the “go to guy” when someone wants to know where oil prices are headed. One wonders if their clients have been asking for refunds lately.

In answer to the essay title, no, it isn’t 100% manipulation as Gheit claimed, but I think he is correct that $90 crude isn’t justified by the fundamentals. The long interest is certainly high and growing, and that alone will drive prices higher as a self-fulfilling prophecy. But there are legitimate supply concerns that OPEC hasn’t yet answered, and it is the expectation of what this could mean that is putting the pressure on prices. If OPEC doesn’t respond soon, $100 will just be a speed bump. If they do, prices will probably drift back down to the $70′s.

But if oil prices hang around at this level for long, come spring you will see gasoline prices again setting record highs. $4 is not out of the question. After all, the price of gasoline is not entirely dictated by the price of oil. Last spring we saw a disconnect as refinery capacity couldn’t keep pace. So even if oil supplies are adequate in the spring, but gasoline inventories are still this low, yes, we will probably see $4 gasoline.