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Daily Archives: April 24, 2008

Oil: the mother of all bubbles?

Reported by WSJ:

Benchmark crude futures have registered an electric performance so far this year and now — near $117 a barrel — hover well above some of the highest near-term forecasts. The speed of the ascent has caught many market participants off guard and forced banks and brokerages to repeatedly revise their oil-price outlook upward.

“I personally think this is the mother of all bubbles,” said Michael Lynch, president of Strategic Energy & Economic Research Inc., a consulting firm in Amherst, Mass. He expects prices to pull back to $80 a barrel by late June, and in the long run step down to $50 as pent-up supply in Iraq, Nigeria, Venezuela and other underproducing exporters starts to flow.

[Crude-Oil Futures]

The case for lower oil prices is straightforward: The prospect of a deep U.S. recession or even a marked period of slower economic growth in the world’s top energy consumer making a dent in energy consumption. Year to date, oil demand in the U.S. is down 1.9% compared with the same period in 2007, and high prices and a weak economy should knock down U.S. oil consumption by 90,000 barrels a day this year, according to the federal Energy Information Administration.

Mr. Lynch at Strategic Energy argues the dynamics of supply and demand justify a price of $30-$40 a barrel, while jitters in unstable exporting regions might reasonably double that price.

“But $114? I mean, the run-up in price we’re seeing in the last six weeks or so has happened while the fundamentals have, generally speaking, gotten bearish,” he said.

Another era of global inflation?

Modest inflation in the US and EU may eventually come down, but not in emerging markets, where central bankers are much less experienced in fighting inflation and their capacity is limited…adding to the trouble is the fact that the share of food in total consumption in developing countries' is much higher than developed economies. For example, Chinese spend about 1/3 of their income on food.  
with sharp rising food prices worldwide, be ready for another era of global inflation, and potentially more currency upheavals. 
(courtesy of wsj)

Fortune Interview of Warren Buffett

What Warren thinks

The scenario you're describing suggests we're a long way from turning a corner.

I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that.