How Big is the ‘Oil Bubble’?Published on Wed, Jun 11, 2008 at 11:43 | Source : CNBC-TV18 Updated at Fri, Jun 13, 2008 at 12:41 "If you go into what I call a bubble boom, every bubble bursts." By Haresh Soneji, CNBC-TV18
Bubbles are rarely avoidable, especially when they are based on stretched fundamentals. Clearly fundamentals seem to have run ahead as far as oil is concerned. At least, that's what legendary investors such as George Soros believe. Every time I wonder on fundamentals, I get bogged down by the thought, 'it's the sentiment, stupid'. And so many textbooks table that short term movements are all about sentiments, where fundamentals have no role to play. The world Energy watchdog's - International Energy Agency (IEA) statement seems to be v So, let's focus on something that everybody Having said that, let's focus on how big the 'oil bubble' could be? The Economist states that oil trade has risen some 20 times since 2002 and estimated to be some $5 tn. Another interesting way to look at it is perhaps the volumes in NYMEX. Light sweet crude volume in NYMEX has jumped some 40% since the previous year or so. A quick math on the numbers, at current market prices, suggests that speculation multiple is 10x the current actual consumption of crude. Jun 2008
Now only about a year back, the speculation multiple was 6x. Jun 2007
Speculative activity no wonder has risen sharply in NYMEX. But, is this the right way at looking at things? Probably not. It however is a rough barometer on the speculation. If daily speculation is 10x world consumption, speculation is really high. A quick comparison with equities shows that futures to cash at 5x shows sell sign as markets are highly lever There are also several economic factors at large that are inflating prices - supply issues, short So, if the bubble bursts and oil prices trickle down, would it be positive for equities? Not really. A bubble break has huge implications to other asset classes. Remember the dotcom bubble bust. Losses on lever Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.
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