Oil prices caught in a global storm of angst

This one has been sitting around waiting to be blogged for a while now. Steve A. Yetiv, professor of political science at Old Dominion University in Norfolk, Virginia, and author of the forthcoming book “Crude Awakenings: Global Oil Security and American Foreign Policy”, writes about the price of oil.

He points out:

All this brings us to market psychology, which is affected by supply and demand but is its own animal as well. Unlike in the past, oil is now traded like other commodities. When traders believe that the price of oil will rise, they go “long the market” or buy into oil, thus pushing the price higher. The more buyers, as with any traded good, the higher the price.

Part of their action is driven by the fundamentals of supply and demand, and part of it is speculation. Speculation can vary in rationality. The stock market bubble that sent U.S. Nasdaq index above 5000 was driven by irrational speculation, not real fundamentals.

Speculation is affected by many things, including fears about oil-supply disruptions in the Middle East, Russia, Venezuela and Nigeria. Today, these fears may well add 20 percent to the price of oil.

Just grin and bear it:

Such fears have always been around, but today they seem to represent a perfect storm of angst. This is despite the fact that there may well be enough supply out there to meet demand and that the Saudis could add about 1.4 million barrels per day if need be, albeit not of the most desired low-sulfur crude.

So there we have it. Yes, things look a bit grim today. But the global oil market can change quickly. In the short run, at least, we may well have to hold onto our hats, grin and bear it.