Alternate Title: It’s the Demand Inelasticity, Stupid.
Oil prices again. Tapis (Malaysian Crude) just broke $100 a barrel and West Texas Intermediate breached $98 briefly in after hours trading. I can already hear tomorrow’s cries from the pundits and purveyors of financial “news” that the fundamentals don’t support these prices.
Let me back up and explain what’s happening here. We have a generation of financiers who were trained in a very specific methodology to analyze stocks. They are now applying that reality tunnel of how stocks behave to deliverable commodities, and in the process are making a huge error. This error culminates in their thinking that speculators and geopolitical threats are artificially inflating the price of oil beyond what the “fundamentals” support as if that’s possible. Here’s the problem: oil futures are deliverable. Every owner of a future contract on the NYMEX can hold that contract to expiration and actually take delivery of 1000 barrels of oil at
It’s like the house near me that has a big “For Sale” sign with a banner saying “Priced Below Market!” No, actually the definition of price is the value at which a buyer and seller come together to affect a transaction—that’s the “market” price. Similarly, the fundamentals support $100 oil because society is happily filling their gas tanks at that price. The issue isn’t geopolitics or speculation, it’s pure inelasticity of demand. Speculator’s can’t drive prices up on a deliverable commodity without highly inelastic demand. Geopolitics can’t create a “threat premium” without highly inelastic demand (setting aside for the moment the issue that we wouldn’t be trying to get oil from