Comment
What OPEC
should do about crude prices; Ideas for trading Crude Oil.
September 25, 2001
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What they should do in times of extreme uncertainty is to widen the price band. If they don't then they would find that oil prices would swing beyond the band, and they will come under scrutiny and pressure to act. You don't need such attention. OPEC deals with wet barrels not paper barrels like in the financial markets. The price signals coming out of the future exchanges does not accurately reflect the underlying changes in demand and supply. The volatility other than reflecting diminishing liquidity more importantly is communicating how difficult it is to see the future with sufficient clarity. Before the US economy slowed, the bottleneck in energy supply was the infrastructure and logistics. With that out of the equation since the US growth had slowed so much, those trading in Crudes could use product prices to estimate the "fair trading" value of Crudes. This is because product prices reflect underlying supply and demand conditions better than crude oil prices after adjusting for supply costs. This should work, because unlike the currency markets, the oil market is much less reflexive, and current volatility presents exciting opportunities for trading as Crudes prices go way beyond the band of "fair value". The difference between prevailing prices and "fair value" is the premium the market pricing the risk of disruption to crude oil. You can estimate if it is sensibly priced.
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