Studying The Oil Market  

Kevin Drum continues watching the oil market, with his latest column looking at the reasons offered as to why the oil price has now reached record heights (in nominal terms at least).

I think he forgot to include the likely additional Chinese demand that will occur as they try to fill their strategic petroleum reserve (assuming that is going ahead in August), jitters amongst the paranoid about possible action in Iran and new "peak oil" funds springing up that show how much interest there is in energy in retail investor circles now.

So: the problem is that OPEC can't increase production; refineries can't increase production; there's no spare capacity; instability in Nigeria is causing panic; summer driving demand will be high; hedge funds are roiling the market; inventories are down; and fear of hurricane season is making everyone nervous.

In other words, no one has a clue what's really going on, so they're just tossing out every possible explanation they can think of. This is actually less unusual than you might think, since one of the peculiar little secrets of the oil industry is that no one actually knows what drives prices up or down. However, it seems to have reached pathological proportion in the past few weeks, and that's not a positive sign.