Thursday, June 19, 2008

Oil vs. Nasdaq: the "bubble" view

As crude oil worked its way back towards the $140 mark last week, the recently favored view of oil as a "speculative bubble" was on full display in the media.

On June 13, a week after crude oil prices made a record move to $139.12 a barrel, Bloomberg covered the bubble view with a story entitled, "Oil Rally Topped Dot-Com Craze in Speculator's Mania". Investors Michael Masters and George Soros were there offering their views of prices in the crude oil market:

``I don't know if you can classify it as a bubble or not,'' said Masters. ``But there is no question that investor demand is having an effect on price. Very little of it has to do with physical supply and demand of crude oil.'' Masters testified at a Senate hearing in May on the role of speculators in commodities markets.

Gains in oil are the result of a ``bubble'' caused by speculation from index funds and a tight balance between supply and demand, Soros said in testimony before the Senate Committee on Commerce, Science and Transportation on June 3. ``The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,'' he said.

So according to George Soros, the upward move in oil prices, "has a strong foundation in reality", while Masters thinks the move has "little... to do with physical supply and demand of crude oil". Interesting.

Well, differing views make a market, but it does kind of make you wonder where Michael Masters is getting his information on crude oil from, considering the recent phenomenon of shrinking global oil supplies meeting steadily rising global demand.

But, listen, I promised you the "bubble" view, and the bubble view you shall have.

Check out this nifty little chart that Bloomberg put together comparing the run up in crude oil prices to the decade long bull market in the Nasdaq and technology shares: "Crude rally surpasses dot-com boom".


So what do you think? Are recent oil prices a bubble or is this a bull market largely driven by supply and demand fundamentals?

Related posts:

"Oil: inflation meets tight supply" - Finance Trends Matter.

"The future of energy" - Finance Trends Matter.