It's a volatile oil market again. Goldman Sachs is talking about crude oil at US$105 a barrel and it is no April Fool's joke. Before giving my views on this, let me start by quoting Stephen King [managing director of economics/strategy Global Head Research, HSBC] in his article "Markets fret too much" (The Sun Weekend, March 26-27, 2005). King deliberated on the fickleness and inconsistency of the financial markets vis-a-vis concern over oil prices -- comparing spring 2003's low of US$25 with the current US$60 a barrel. He went on to say that "few had thought oil prices would ever get to these levels".
I partly share his views on the fickle nature of the financial markets. However, we fail to recognise the fact that it is not the markets which are at fault, but rather, the fickle-mindedness and herd instinct of most market players, especially speculators and traders. That's the psychological component that defies logic, and unfortunately, behavioural economics is still at the infant stage.
It is hard to study how market players behave, especially in response to an external stimulus such as an escalating oil price. However, like Goldman Sachs, I had forecast a similar range of oil prices in my article "Flirting with the US$60 barrier?" featured in the Right Timing Special (Issue 513, Aug 30, 2004).
In that article, I forecast the oil price to reach US$56 a barrel by November 2004 and a possible high of US$102 a barrel later. My forecast then was off by one month as the New York Mercantile Exchange (NYME)'s crude oil futures actually peaked at US$55.57 a barrel in end-October 2004. I do not want to be an alarmist but I maintain my long-term forecasts.
An article warning of a possible US$105 a barrel for crude oil by 2007 -- "Goldman Sachs superspike report warns of US$13 gas, US$105 crude" -- was published by the Intelligence Press on March 31, 2005. The forecast, which was made by Arjun N Murti, was similar to the one I made seven months ago. Certainly, crude oil futures on the NYME will still be volatile, at least until the market fully digests the report.
There have been quite a number of comments against that report, though. One market expert said: "They better watch themselves. If there is even a hint of them trying to manipulate market prices, they are in deep trouble. I've been a technician for 35 years... You cannot predict a super-spike! I have no idea what they are talking about."
As I see it, the so-called "superspike" of up to US$105 a barrel needs to be looked into thoroughly. Murti attributed the significant increase in world oil prices in recent years primarily to fundamental factors and geopolitical turmoil. Fundamentally, the fearsome scenario is beyond imagination, with the possible exception of an Iran-US war. However, anything can happen under the Pax Americana agenda.
Technically, I can't recall coming across the term "superspike" -- it was never mentioned in Frost and Prechter's classic book, Elliot Wave Principle: Key to Market Behavior. I suspect Murti was looking at technical charts to arrive at his forecast for crude oil prices. In contrast, my forecast of US$102 a barrel was based on charting, that is, one that is pegged at a possible extension of 6.85X in Fibonacci terms. That's based on arcane ratios/extensions for non-believers in the Elliot Wave Theory.
Recalling a chapter from John Kenneth Galbraith's The Great Crash of 1929, "In Goldman, Sachs We Trust", it baffles me that market players were so easily drawn into it. Even the new research report from Goldman Sachs sent energy prices through the roof immediately.
In the US, oil for delivery in May breached the US$58 a barrel in early trading on April 1. Will the price surge past this figure and remain high irrespective of whether or not one believes in the Goldman Sachs' report? But one thing for sure, discussion about a possible US$60 a barrel crude oil will attract more interest.
Food for thought: Wouldn't it be nice if we have a crude oil futures market in Kuala Lumpur? We could have generated much trading for our crude oil blends, including Tapis, in today's volatile crude oil market. It is an irony that Singapore has crude oil futures, yet does not produce even a single drop of oil.