It's a disconnect that has some oil traders shaking their heads, even while other oil industry pros say the condition is warranted. Oil is sloshing around in global markets, but its price remains relatively high at around $50 per barrel.
Case in point: Rotterdam, Europe's largest port, is running out of space to store crude oil, Bloomberg News reported Wednesday. Rotterdam can store about 75 million barrels of crude oil, or about a five-day supply for the European Union, which in 2009 is expected record consecutive demand declines for the first time in 25 years.
Meanwhile, U.S. oil inventories are at or near three-year highs. And yet, the price of oil hangs above $50 per barrel, trading up $1.01 to $50.93 on Wednesday at mid-day. Unleaded gasoline averages about $2.05 to $2.15 per gallon in the United States, according to gasbuddy.com data.
$50 oil: A paradox
To be sure, oil's still down about $100 since hitting the truly outrageous record of $147.27 per barrel in July 2008 during the leveraging bubble, but $50 still is an historically high price for oil. Add U.S. and global recessions to the mix and it appears to be an anomaly. Energy Trader Jim Dietz argues that contradiction has to be corrected, and he believes it will be to the downside.
Dietz argues one of two things has to occur: either oil demand has to increase or the price of oil has to fall. Dietz has calculated that the price of oil will fall, and is short oil, with numerous monthly contracts. He expects oil to retest lows below $40 by mid-year. Or as he puts it, "Reality will reappear soon."
Veteran oil analyst Matt Simmons, founder of Simmons & Co., a Houston-based investment bank, holds a different view. Simmons argues oil's price decline from record-highs has taken many oil fields out of production. That deceased production, plus aging oil fields and the credit crunch's impact on oil exploration, are likely to lead to a spike in prices, after both the U.S. and global economies resume growing. With the above in mind, investors seeking to "get ahead of the pack" or anticipate the economic recovery, are positioning themselves in oil now, which is boosting its price above where it would be, given current, relatively light demand conditions.
Economic Analysis: The "get ahead of the pack thesis" appears to be the most plausible argument regarding oil at $50 per barrel amid an oil glut. However, that's not to give short shrift to Dietz's argument: if the U.S. and global economies do not show signs of rebounding in the second half of 2009, traders and investors who bought oil at $40 to $45 may start to exit those positions, at which point Dietz's sub-$40 prediction would come into view. The dollar, of course, also remains a factor in oil's price (a falling dollar boosts the price of oil), but so far the dollar is holding its own against the world's other major currencies despite record monetary stimulus.
Hence, it appears GDP will decide oil's fate: rising U.S. global GDP -- including signs that the recession has bottomed -- will push the price higher; a lack of growth, and oil trends lower.