Crude oil fell more than $2 a barrel on signs that a 15 percent increase in prices this month isn't justified by stockpiles and demand.Here's how I see it now:
Consumption averaged 20.3 million barrels a day in the past four weeks, down 1.3 percent from a year earlier, the Energy Department said yesterday. Prices climbed above $135 a barrel today as OPEC ministers said they could do nothing to prevent higher prices because they are pumping at capacity.
"The fundamentals justify a price between $80 and $100," said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. "The run-up in prices has more to do with institutional investors coming into the market. There's nothing to discourage them from doing so because the returns have been so high."
...
"Even a bull market has to consolidate at some point and it looks like that's what's happening today," said Addison Armstrong, director of market research at TFS Energy LLC in Stamford, Connecticut.
1. Supply and demand could justify high oil prices, in that China and India are definitely consuming more oil, and supply has stalled because there have been fewer major oil discoveries.
2. The measure we usually use to determine whether there's a bubble in a commodity (inventories) doesn't point to an oil bubble.
To me, that doesn't warrant the conclusion that there isn't an oil bubble. Remember, there's not conclusive evidence that fundamentals are driving oil prices either, there's just a plausible story that could explain the high oil prices.
Moreover, the fact that a very basic measure suggests that there isn't an oil bubble doesn't prove that there isn't actually an oil bubble. The absence of conclusive evidence for a proposition doesn't disprove the proposition. It just means there isn't sufficient evidence to prove the proposition.
Frankly I think most of the debate boils down to different definitions of what constitutes a "bubble." Those who argue that there is an oil bubble tend to take a short-run view of bubbles -- they ask whether today's price of crude oil is justified by supply and demand. Conversely, those who argue that there isn't an oil bubble tend to take a long-run view of bubbles -- they ask whether high oil prices in general are justified by supply and demand, and are less concerned with day-to-day oil prices. The two sides may just be talking past each other.
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