The Outlook for Oil prices.

The Outlook for Oil prices. (Taz).

I'm posting this because I agree with him the increase in Price per barrels is temporary, it will come back down.

Short Term.

In the next 3 to 6 months, in the absence of major coordinated production cuts, I believe we will see the market price collapse, possibly to levels which test the lows of $26/barrel or so reached in January of this year.

In my analysis, the doubling of market benchmark prices (US WTI and North Sea Brent/BFOE grades) since then represents a financial bubble. This was created by the purchase of massive futures contract positions by managed funds. These market positions - only some of which are the hedge funds whom commentators blame - are supported by liquidity sourced from Euro Quantitative Easing by the European Central Bank.

Furthermore, the current market noise blaming supply disruptions - which to be fair do exist in Nigeria and Libya particularly - ignores the record levels of Iraqi oil production and Iranian oil production which has almost reached pre-sanction levels.

But there is another far more important factor which is not widely understood. Most market commentators have a fixation on reported crude oil inventory levels and their daily recommendations and comments react breathlessly to changes in stocks of oil.

Now, while oil producers and refiners maintain buffer stocks for resilience reasons of security of supply and demand, oil buyers such as China, increasingly also have a financial motivation which is that they prefer to hold oil stocks as a reserve asset to holding dollar reserve assets, which return zero percent per annum.

Commercial oil producers & refiners, and oil traders, on the other hand, are intermediaries or middlemen who are motivated by dollar profits and not by charity. What I mean by this is that such market participants will not maintain an inventory of oil stocks above an absolute minimum unless their costs of storage in tank or tanker, insurance, and bank debt interest costs are met.

Read the full story (Medium and long term) here.