Oil Prices

I find watching oil prices somewhat interesting because of the volatility. When prices bump either up or down, all the pundits come out of the woodwork to extrapolate further on the latest tangent. I think the truth is, no one really knows what the future holds, not even OPEC members themselves know. What will the demand in China and India look like in several months is anyone's guess. Will Russia receive significant foreign investment and start producing more? Will a worldwide recession hit and decrease demand? Will there be a cold winter in the northern hemisphere? How much has fear and uncertainty added to oil prices? Have the hedge funds driven prices to extremes? Will there be political games that move the price considerably up or down? The answers to these questions and many more are simply unknowable. But I do find it interesting watching people try to rationalize and explain oil prices.

I am sometimes reminded of people who predict a cold winter because they have observed animals with thick coats of fur. Thus, according to their logic, a cold winter must be coming. In reality, all that a thick shiny coat of fur indicates is that the animal enjoyed a good summer with plenty of food. Similarly, when I see pundits commenting on oil prices, I often wonder if the facts on which they are anchoring their arguments will have any substantial bearing on the outcome. Or are they simply telling us that a thick shiny coat of fur is indicative a coming cold winter.

Nymex crude is $63.25. Just as a point of interest, the futures price for December 2010 is $57.94. The futures market is presently exhibiting backwardation. I am curious to see how energy prices do play out. In 2010, will prices be above or below $57.94? My guess is that prices will be higher, but I am only guessing. I am basing my guess on that prices have stayed persistently high for a long time now. Normally, spikes are just that—spikes. I am not anchored to my guess and will readily change if the world begins to indicate a different outcome.