Forgive me if you’ve heard this one before, but a classic Wall Street joke illustrates an important concept.
On a slow day in the markets, trader A decided to open bidding on a can of sardines. He offered it at $1. It was snapped up by B at $2, who sold it to C at $3. D jumped in at $4 and E finally prevailed at $5.
Proud owner E opened the can and found the sardines had gone bad. He went back to A and complained, ” You sold rotten sardines! I want my money back.”
Grinning, A said, “Son, those weren’t eating sardines. Those were trading sardines.”
Anything can be made into a store of value if everyone agrees. Western societies have had a fondness for gold and precious metals, but any material will do. The Mayans used feathers.
Oil and commodities are increasingly being used as a store of value as inflation concerns make the wisdom of relying on financial instruments seem dubious. But per the little story above, once participants quit seeing commodities as an inflation hedge, they will revert to their fundamental price level. And the indications increasingly are that those values are well below the price the market currently assigns them.
Reader Michael e-mailed us this story from Platts. Note that by Japanese standards, this is an unusually pointed discussion:
Japan’s vice minister for economy, trade and industry, Takao Kitabata,said Monday that current oil market fundamentals only supported a crude price of $60/barrel, less than half current levels.
Speaking to reporters, Kitabata said current oil prices could not be explained by fundamentals and blamed speculative funds for pushing up prices, according to a transcript of his press conference in Tokyo…
“About three weeks ago Goldman Sachs said crude oil prices would exceed $140/b, and prices shot up by $10/b from levels of around $120/b. Then Morgan Stanley said oil prices would reach $150/b during the driving season by US independence day [July 4],” Kitabata told reporters.
“Oil prices rose to above $130/b after the Goldman Sachs announcement, but retreated to $120/b levels after the US Commodity Futures Trading Commission’s announced investigation.”
“However, prices have risen by $10/b after Morgan Stanley’s announcement,” Kitabata added. “I said [three weeks ago] that it was hard for us to define the cause [of high oil prices], however I must express anger [over the movements].”
The vice minister said the rise of oil prices above levels than can be explained by fundamentals would lead to oil-producing countries receiving more money than they need for their exports, while at the same time hurting consuming countries, especially developing countries without their own oil production.
“We believe producing countries’ economies will function if oil prices hover more or less at $60/b,” Kitabata said. “Despite the weakening of the US dollar, we believe Saudi Arabia’s [economy will function] if oil prices are at $45/b and Kuwait’s [economy will function] if oil prices are at $55/b,” Kitabata added.
When asked why energy ministers from the G8 — the US, Japan, Canada, the UK, France, Germany, Italy and Russia — failed to have sufficient discussion at their July 7-8 meeting on the link between high oil prices and flows of money from investment funds into the oil market, Kitabata argued that the ministers had had “spirited discussion on the matter.”