Indy Telecom & Industrial Media

So, it looks like the OPEC is going to convene earlier than their scheduled date of November 18th. What’s the emergency, I wonder?

Will they cut production? I should hope not, because the current volatility and markets could hurt rather than help them.

Most oil producing countries would be happy at a much lower rate, and would much rather have limited volatility to fund their internal projects.  A production cut at this point can only do one thing — bring down the wrath of the rest of the world on them.

A quick look at the production will tell you that despite the downturn, the production has only gone up.

However, the lower prices could potentially be contributing to a higher demand. An increase in prices could only potentially serve to decrease the demand, normalizing their profits in the short term.

Of course, in the long term, they get to keep the oil prices at the much higher rate, which would always be a good thing for them I guess.

So, the awesome folks at Dealbreaker have posted two equity research reports by Oppenheimer that talk about the current valuations of US banks (Oppenheimer Note-US Banks and Oppenheimer-US Bank Slide Show). The crux of the reports is that for the current financial markets to stabilize, valuations need to be address “true asset values” and get back to adjusting their books to that effect (and for whatever reason, this is stated oh-so-many-times in both the documents).

Not that I disagree with the fundamental premise of the reports, but one thing is that while fundamentals are certainly very crucial, a lot of valuation is also driven by sentiments. This is particularly true in banking, and one but need look at Bear Stearns (and currently, Lehman) to understand this.

And as far as liquidity is concerned, the economy is quite flushed with money, thanks to our wonderful Fed (and Uncle Benny).  It would be hard not to be, given the current rates of inflation and interest rates. That is not the problem. The problem is that the current market sentiment is driving folks towards more and more liquidations, and a lot of it is used to hedge against what the market perceives to be a free fall.

Quite obviously, this is compounded by increasing oil prices; however, oil is also heavily driven by market sentiment. As a result, we are seeing a rise in what is otherwise quite an inelastic market. Eventually, however, this is already beginning to have impact on oil consumption, which could potentially drive oil prices down.

That said, it is also quite possible that oil producing economies could cut supply to ensure that prices stay high. I would think that this would be beneficial to them on one hand; however, given increasing inflation concerns and low consumption, it might not be in their best interest to do so.

I’ve been saying this for a while, but the WSJ has an article wondering if oil would the next bubble to pop.

In fact, to anyone who’s been following trends, it is quite obvious that oil has been fast approaching the “bubbly” state. People far wiser than I have said so, as well.

From the WSJ article -

Lehman Brothers on Friday compared the rally to the one-upmanship of the dot-com boom: Wall Street analysts have repeatedly raised their price forecasts as oil prices have soared, driving new investor flows that have pushed prices to still-higher levels, leading to still-higher price forecasts. Lehman sees the “classic ingredients of an asset bubble,” with financial investors driven by a “herd” instinct and chasing past performance.

Of course, the key difference between oil and the tech or housing bubbles is that oil is strongly based on fundamentals, while the latter is heavily based on pure speculation. However, that has been slowly changing, because there is no way that oil could have hit $130 purely on the basis of weak fundamentals.

Secondly, general market sentiments over higher oil prices are driving down demand, and a strengthening US Dollar (all hail Uncle Benny!) seems to be pushing the prices down.

The other thing to keep in mind is that while the US economy is doing badly, European economies aren’t much better. China has also been badly battered by the new earthquake, and the increasing oil prices and food shortage is having its say on India and the rest of Asia (this includes SEA and SA).

Also, while the oil bubble may have been triggered by weak fundamentals, it is increasingly being driven by speculation. If this is not the sign of a bubble, I do not know what is.

While it looks like the oil prices may not hit the $100 mark after all, I did read a rather bizarre article on the New York Times on a proposed Indian solution to help contain the rising oil prices.

M.S. Srinivasan, who is India’s Petroleum Secretary, is as worried as anyone else about the rising oil prices, despite steady demand and steady supply (we’ll ignore the temporary jumps due to oil rigs being closed in some parts of the world due to unfriendly weather in the seas).

His solution?

Why, taking the crude oil off the commodity exchanges, of course. The way he sees it, the speculators are driving up the prices of oil, fueled (pardon the pun) by investors from hedge funds, banks and other financial institutions that have poured a lot of capital into the oil market.

Not that it’s a bad idea, per se, but it does sound a lot like an Indian idea — when something does not work, regulate it until it does.