T. Boone Pickens must have lost a bundle on oil prices recently as his hedge fund was betting on a price fall. But the pressures that have gripped the oil price have taken it to $120 this week, and once momentum gathers pace a price spike up to $200 can not be ruled out, indeed it starts to look inevitable.
When Hilary Clinton threatened to obliterate Iran yesterday if the latter attacked Israel with nuclear weapons – an admittedly unlikely scenario without delivery systems or nukes as far as we know – it was a reminder of the geopolitical fragility of the oil market.
The 1980 oil price spike to $38 a barrel came after the Iranian revolution and the Russian invasion of Afghanistan. More recently this week a Japanese oil tanker has been attacked off Yemen and Nigerian pipelines are in jeopardy. Oil prices remain vulnerable to big spikes on big events, and events are very unpredictable.
But it is a build up of smaller fundamental factors that underpin the technical position in the oil markets which is undoubtedly fuelled by a massive increase in hedge funds trading in energy derivatives.
Russian oil output has peaked joining the UK whose North Sea oilfields are in rapid decline. It is not that the world is running out of oil, but the world is running out of cheap oil that is easy to get out of the ground.
At the same time the middle classes of India, China, Brazil and Russia are demanding a higher standard of living and buying cars and energy-intensive foods. And the rate of economic growth in these countries means that fundamental demand for oil is rising very sharply.
It was perhaps more remarkable that oil prices remained relatively low for two decades from 1980-2000 than that they are increasing fast now. For if you adjust oil prices to the change in the money supply since 1980 then you can very easily adjust $38 a barrel to $200.
Indeed, $200 only really catches up with money supply growth to date. If the Federal Reserve continues on its mission to inject liquidity into the world economy to forestall a recession then monetary inflation is inevitable, and oil prices should logically be higher again.
But it would be surprising if there was not a seasonal oil price downturn of the kind T. Boone Pickens was expecting. On the other hand, this would not be the first time that momentum trading gripped a market and overpowered seasonal factors. It might take a global recession next year to cool things down.
