Saipan rides the oil roller coaster

Gasoline prices have drifted down a little bit in the Commonwealth, this on the heels of a decline in global oil prices. West Texas Intermediate crude, a popular benchmark flavor to quote, was trading at about $85 a barrel yesterday, down from $103 at the start of this calendar year. One year ago it was $100, so it’s down about 15 percent.

Is this a sign that oil has turned the corner and that fuel prices will fall to comfortable levels? Is it time to party like it’s nineteen-ninety-nine?

I’m not popping any corks. This is a roller coaster, and we’re blind to what is ahead.

Some commodities have been weak lately, sinking atop the sagging fundamentals of the global economy. Oil has its own gig going. In oil’s case, I suspect that the market fundamentals (immediate supply and demand) are out-muscled by international political tensions. There’s nothing shady about that, it’s just the nature of how uncertainty gets folded into things. Everyone has to account for the risks of mayhem in the Persian Gulf, and these uncertainties put upward pressure on futures prices, which, in turn, but upwards pressure on today’s prices. So if prices have relented, I suspect that the mayhem worries have, too.

Although worry is an invisible thing, it makes very visible results in prices. Everything in economics is based on expectations; that’s what moves markets.

If you’ve ever flirted with the notion of speculating in oil, a look at the past decade will either seduce you into the gig so you can make a lush killing in volatility, or convince you to take up stamp collecting instead.

In early 2002, oil was running under $20 a barrel. Then it started pretty much a straight climb up to over $145 a barrel in July 2008.

Then it popped like a ripe zit on prom night, collapsing to under $39 a barrel by late December of that year.

Yikes!

If you and I had anticipated that move, either on the upside or on the downside, we would be having this discussion in Macau right now, enjoying the view from the penthouse suite and sipping fancy drinks with little paper umbrellas in them.

Unfortunately, poor mooks that we are, instead of twirling paper umbrellas we’re unwrapping rolls of Tums, the better to confront the dyspeptic stress of buying gas every week.

So what’s the market consensus about oil prices? That’s easy to see, since it’s listed in futures prices. A barrel of oil to be delivered in June of next year is priced at $87.25 today (well, yesterday). So it’s essentially a flat expectation. Will this change? Of course it will! It will change every trading second on commodities markets. In fact, the one thing we can know for virtually certain is that in June of next year oil will not cost $87.25 a barrel. It might be more. It might be less. Like I say, expectations are everything, and expectations constantly change as updated data, fresh news, and new rumors hit the wires.

And this doesn’t have to be dramatic stuff. In fact, most of it is quite routine. Of course, that’s life itself; it’s usually routine until something big comes along, which is why we buy car insurance, and home insurance, and health insurance, and life insurance. We expect the unexpected, and the costs of providing for that are built into our budgets. So normal life isn’t all that alien from the workings of oil markets; all markets allocate risk and they price accordingly, though some do it more explicitly than others.

Anyway, my take on anything, including oil, is to ascertain whether short-run changes in prices are more likely to be based on the supply side or the demand side. I think oil is clearly a supply-side gig. If you’re looking for an example of a demand-side gig for contrast, I’ll give you one: gold.

Overall, my guess, and it’s only a guess, and not one I am willing to put my money behind, is that many commodities might be looking at a substantial fall in prices within the next year or two. However, beyond that, I think industrial Asia will assure a healthy demand and firm prices for commodities in the longer term.

But as for oil, well, once again, it is a special case, since its supply-side vulnerability is acute. It can get a price shock in mere minutes. We’re talking geopolitics now, which nobody can predict in terms accurate enough to translate into reliable oil price forecasts.

Well, nobody who I know, at least. Maybe I need to keep better company; oddly enough, I’ve heard my friends make the same lament, but always behind my back for some reason.