Historic move for historic times yet the speculators still get the blame. Oil makes a new low for the year as the credit crisis hits the Persian Gulf. No I am not just talking about the fall in oil prices and its impact on the Gulf state’s economies. No what I am talking about is that fact that the credit crisis has caused big problems for the Gulf States banks. The Wall Street Journal reports that a speculative currency trade forced Kuwait to bail out one of the county’s largest banks. The global financial storm has caused Kuwait’s central banks to have to step in and guaranty bank deposits. At the same time Saudi Arabia has offered $2.3 billion in loans for low income bowers in an effort to get their local economy back up a running. Who said that the Gulf States were immune to the credit crisis? Well you can just forget about that.
The Persian Gulf the last of the so called save havens from the credit crisis seems to be just as susceptible to banking problems as the rest of us. Another piece of the decoupling theory puzzle does not seem to fit. It should be clear to even the staunchest proponents of decoupling theory that it is a discredited theory. The U.S. is still the world’s driver of economic growth, for better and worse the markets have to adjust to that fact. Oil revenues may hide economic problems for awhile but it will not make you immune to them.
This is crisis of global proportions and it will affect everyone around the globe. The fantasy that the word has decoupled from the U.S. economy has come to nightmarish end. The Middle East that was supposed to be untouchable because of their oil price clot is now struggling and will struggle more because of the lack of diversification on their economies. The effects of the credit crisis and its effect on oil is becoming more and more apparent everyday yet there are still some that still live in a state of economic denial. And despite the historic nature of the events that have surrounded us there are still so many people that still do not get it.
There are still some that are trying to blame future market speculators for the moves in oil. Yet speculators do not drive the times but are reflection of the times that they live in. What you have to understand that this year oil had to adjust to one of the largest global financial shocks in history. Anytime an oil trader or analyst tries to tell you that speculators are the only thing driving the market it is a clear sign that they are ignorant of the bottom-line fundamentals. That ignorance of course is a danger to the markets as it may lead to over-regulation and destroy the market mechanism that has allowed for the constant availability of supply. Any analyst that tells you that he is smarter than the market is probably dumber than a box of rocks.
That is not to say that speculators can influence the movement of a price now and then, they can. But try to imagine specs bullying this global market. Just the massive amount that is traded on a daily basis would make it almost impossible for specs to drive oil for long. Any speculative abnormality will be quickly corrected by the weight of the fundamentals.
Those that say that speculators were the main cause of the historic up move and down move that we saw this year and in years past in oil shows a total lack of understanding of what drives markets. Markets have to move up and down to discover a price and the go up and down to adjust to changing fundamentals. As the markets give us price discover the movement up and down are also doing a kind of fundamental discovery. What price is too high that leads us to the point when demand fails and what point are price to low where demand crimps supply. This moves the market made this year was an adjustment to a major economic crisis as it was constantly evolving.
Trying to suggest that speculators were the only cause of driving prices higher and lower this year fails to acknowledge or shows a lack of understanding of the gravity of the global financial crisis.
Yes speculators did move to but oil in droves at the very beginning of this credit crisis but they did so for what were fundamentally sound reasons. They bought oil because the dollar was getting crushed and they bought oil as they felt that the U.S. economy was in trouble they would have to continue to cut rates. The market at that time reflected the fact that the crisis at that time was in the U.S. and Europe and the developing world seemed unaffected. The market had felt that the global economy had decoupled from the rest of the globe and oil demand that was lost in the U.S. would be easily made up in Europe the Middle East and of course China.
The Oil market and there spike reflected the fundamental belief at that time that oil demand would be unaffected. Speculators played that out driving prices higher. Yet unlike past spikes in oil when demand was unaffected because of strong demand this time we saw demand start to fall in a historic fashion. The latest evidence of the historic nature of that demand drop came when the US Department of Transportation reported that Americans drove 5.6% less or 15 billion miles less in the biggest monthly decline in history.
That was a signal that the fundamentals were changing again. It became more clear as demand started to drop in Europe and demand growth in China failed to live up to expectations. The bank problems began to spread across the globe. Now the U.S. starts to look strong again because it is now regaining its reputation as the world’s economic driver and any recovery will be led by the USA.
Phil Flynn is vice president of Alaron Trading and a Fox Business News contributor. He can be reached at firstname.lastname@example.org.