$70 Oil: The New Normal?

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$70 Oil: The New Normal?

Few investments performed better than oil during 2009's second quarter. Black gold is up 44% for the second quarter and has traded near $70 for the past four weeks.

But a consensus appears to have emerged that oil is overpriced and ready for a fall. The International Energy Agency released a report on June 29 showing weak demand. Furthermore, while fundamentals may be determining the direction of the price, speculation is responsible for oil's enormous price swings. In its Perspectives Quarterly, Credit Agricole says that $70 is unsustainable. "Looking at fundamentals, however, the recent rebound in prices appears overdone," the French bank says. It expects prices to return to $60 per barrel in the third quarter before increasing to $68 per barrel in the fourth quarter.

And the Wall Street Journal attacked the notion of $70 oil in two separate blogs, "$70 Oil, but Where's the Demand?" and "Is the Oil Bubble Back?"

British bank Barclays has a different take. In a new report, Commodity Refiner: Children of the Revolution, Barclays claims the fall in oil to below $40 a barrel was the aberration, and the recent rise in oil prices is a "return to normalcy." Look no further than the price of December 2015 futures contracts, which have traded above $66.77 since September 2008, despite market turmoil and the complete collapse of spot oil to under $40 a barrel.

"Even at the lowest point for macroeconomic expectations, and for oil demand forecasts and sentiment, the idea that a sub-$70 per barrel price could be sustainable did not seemingly gain any significant traction," the report says.

Barclays attributes oil's renewed vigor to the fact that the world economy didn't implode, an event that may have been priced into the market. (Sorry, no link.) It also says that the declines in oil production caused by the collapse in oil prices has yet to hit the economy. When it does, it will make up for the lack of demand cited by the IEA.



If Barclays is right, it's time to stop assigning blame for $70 oil and learn to live with it.