Friday, August 21, 2009

Dresdner/Commerzbank blames oil speculators (and a $50.00 price target)

They were the first big bank to say it flat out. Two of the sharpest market players I know of, Paul Tudor Jones and Wilbur Ross both said last year that the oil market was a bubble (and by definition speculator driven). Here's FT Alphaville:

Wow, the commods analysts at Dresdner/Commerzbank have taken a rather bold — if slightly self-congratulatory — stand on oil speculators.

In a note published on Thursday, analysts Eugen Weinberg, Barbara Lambrecht and Carsten Fritsch, are very clear: oil speculators have driven up oil prices, and pending an imminent clampdown by the CFTC, those oil prices will now be going down — closer to their fundamentals.

Here’s the start of Dresdner/Commerzbank’s thesis:

In the commodities market it is well worth going against the flow in order to recognise the important turning points. We were virtually alone in our opinion that last year’s oil price rise was mainly due to actions of financial investors. The market, on the other hand, attributed the price rise to structural changes both on the demand side, with the increasing role of emerging countries, and on the supply side with the “peak oil” theory.

Our view that a speculative bubble had formed in the oil market proved correct when it burst with spectacular effect after the price had risen to around USD 150 (chart 1). When the price subsequently nose-dived to around USD 30 per barrel in Q4 2008, we interpreted this as an exaggerated reaction, after many investors simply fled the oil market. This year we anticipated stabilisation of physical demand and normalisation and recovery of equilibrium in the oil futures markets, and were one of the few banks to predict — right at the beginning of the year — that crude oil prices would rise to USD 70-75 per barrel by year-end. This has already come to pass. So why are we now revising our forecasts downwards when the price curve is following our scenario, the economy appears to be recovering and demand from China apparently rises unabated? It is because we have been right for the wrong reasons and prices rose on different factors other than those assumed in our scenario!

Fundamental changes were not so much the cause, rather the rise was due mainly to the greater risk appetite among financial investors, optimistic expectations and increased liquidity. This is also supported by the higher correlation between the oil price and the equity and currency markets.

So how much speculation is in the oil price then?>>>MUCH MORE including a $50.00 fourth quarter price target.