As we reach the end of September 2018, it is becoming clear that significant changes are on the horizon. While the specifics remain uncertain, preparedness is advisable before we face potential disruptions.
Recently, an anonymous affluent bidder purchased Norman Rockwell’s portrait of John Wayne for an impressive $1.49 million at the 12th Annual Jackson Hole Art Auction. According to auction coordinator Madison Webb, the atmosphere was charged with enthusiasm.
Indeed, it requires substantial enthusiasm—and a well-padded wallet—to spend that much on a depiction of “The Duke.” However, such positivity can falter quickly; soon enough, the buyer may regret such a lavish expenditure.
It’s plausible that the buyer is a devoted fan of classic John Wayne films, an avid collector of Norman Rockwell pieces, or perhaps someone who won the lottery and feels compelled to spend their winnings extravagantly.
While this art auction may seem tangential, artworks like this one often reflect societal moods. A portrait of a 20th-century actor embodying 19th-century American nostalgia fetching nearly $1.5 million suggests that deeper trends are at play.
Sanctions and Bottlenecks
Take oil prices, for example. Currently, WTI crude trades above $70 a barrel, and Brent crude exceeds $80. Aside from a brief spike earlier this summer, oil prices have not been this high since their dramatic decline in late 2014. So, what is driving these changes?
Oil markets are inherently cyclic, with production and consumption oscillating frequently. Prices can fluctuate wildly as supply transitions between surplus and shortage. But that’s not the only factor at play.
In addition to the typical supply-and-demand fluctuations, oil markets are heavily influenced by government interventions. The Organization of the Petroleum Exporting Countries (OPEC), a coalition of 14 nations often allied with Russia, frequently collaborates to regulate oil prices according to their interests.
Several factors may further escalate oil prices. U.S. sanctions against Iran’s oil exports, delivery bottlenecks for U.S. shale oil, and OPEC’s reluctance to significantly increase production despite President Trump’s urging might all contribute. According to Bloomberg,
“Major oil trading houses are predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.”
“With Brent crude already jumping to an almost four-year high, this is exactly the type of price surge President Donald Trump sought to prevent by urging OPEC to increase production. Yet, the cartel and its partners gave mixed signals at a meeting in Algiers, showing little inclination to comply with U.S. demands to quickly drive down crude prices.”
Oil Mania Redux
For every viewpoint, there exists an opposing one, creating a spectrum of arguments that contradict each other. Each perspective is supported by its own rationale, creating a complex narrative.
For instance, petroleum geologist and oil analyst Art Berman contends that rising oil prices are unlikely to sustain themselves for long. He presents a metric known as comparative petroleum inventories, which measures inventory levels against the five-year average. Berman believes that crude supplies will soon exceed demand, leading to a decline in oil prices.
Who is correct? Will oil prices reach $100 or fall to $50 a barrel? Only time will provide clarity. The Economic Prism refrains from predicting oil prices, yet we offer a reflective anecdote.
Back in June 2008, Brent crude soared to nearly $150 a barrel. Many analysts claimed we had reached peak production, asserting that prices would inevitably continue to rise. Speculation drove prices higher, reinforcing the peak production theory. A mere six months later, oil prices, along with stocks and real estate, tumbled.
The takeaway is that prices can sometimes follow supply-and-demand fundamentals; at other times, they diverge significantly from those fundamentals. During periods of speculative excitement, emotions can override rational decision-making.
Currently, markets are at a tipping point, suggesting that something significant is imminent. The Federal Reserve is tightening the federal funds rate, while the yield on the 10-Year Treasury note remains above 3 percent. However, emotional sentiment continues to dominate the market.
There’s no doubt that the timing is right. Markets appear primed for movement. What better candidate than oil for an explosive price spike followed by a crash?
Sincerely,
MN Gordon
for Economic Prism
