smiley wrote:It is often said that the problem with predicting oil prices is that we have never seen a structural deficit of an important industrial commodity.
Perhaps I found an analogy with oil, molybdenum. Molybdenum is a metal which is used in steel production. Since 2002 supply demand balance swung to the demand side. The demand has outgrown the supply.
This deficit has had some very interesting consequences for the price. over the past three years the price of molybdenumoxide has increased from $2 to $28.50, a fourteenfold increase. Since the speculative position on this market is relatively small we can assume that these prices reflect the real supply demand fundamentals. It is staggering to see how a relatively small supply shortage can lead to these enormous price increases. It really shows how inelastic these markets are.
I think the steel market and the oil market are fairly comparable when it comes to inelasticity. If so then this is what we can expect for oil when the market runs into a deficit. The price increases we have seen so far are nothing compared to what is going to happen.
If moly is of any guidance we can expect the price to suddenly double, triple or quadruple when a real shortage occurs. That is a pretty scary thought.
But there is a bright side. I still have 1.5 kg of moly at home, which means that I made a pretty cool profit without knowing it.
I thought I'd dredge up this thread, if only for the education of those who somehow hold the notion that "if supply goes down 1%, the price should go up only 1%." This is NOT the case, in fact, as well with all inelastic commodities. If demand outstrips available supply, by even a little bit, it's certainly not uncommon for prices to take on extreme volatility. If this was true in 2005, then it certainly remains true for 2008.
I would like experts like MrBill to please add to this thread, esp. if there is an argument to be made otherwise. I am certainly no economist.
