Despite recent weakness, oil prices continue to hover above $100 per barrel and are "almost certain" to hit $150 in the coming year, according to Dr. Kent Moors, a professor at Duquesne University and founding editor of The Oil and Energy Investor.
"If you look only at oil prices, all of the basic indicators I look at are going up and just about anybody in the industry will tell you that," Moors says, citing currency considerations, supply/demand, inventories, geopolitical uncertainty and other traditional fundamental metrics.
In addition, "the speculation is running the market," he says. That's not necessarily a news flash and Moors recommends many of the same remedies to dampen speculation as prior guests, including:
- Higher margin requirements
- Position limits on crude contracts
- Regulation of over-the-counter derivatives.
Where Moors' work differs is an accompanying focus on what he calls "disconcerting" anomalies in crude trading, as detailed in his new book The Vega Factor.
Increasingly, Moors sees "deviations in the trading of oil futures and options on oil futures [that are] much greater in either direction than formulas on which the options are based would specify."
In other words, the oil market is not behaving in ways in which the models used by professional traders say it is 'supposed' to behave.
As a result, "an entire new generation of synthetic derivatives are being introduced to make the [trading of] paper and wet barrels fit," Moors says. "I like to tell people, 'if you like the subprime mortgage crisis problem, just wait until you see this bubble.'"
Vega refers to the range of volatility in a given options and Moors believes the volatility in crude prices is going to continue to widen, with more frequent violent swings in both directions. Yes, that means oil prices can fall as quickly as they rise — as was the case in 2008 when oil plummeted from $147 to $35 in rapid succession.
While most Americans would cheer falling oil prices, Moors' point is that these kind of "fat tail" events will happen with increased frequency and "affect the world in ways not previously imagined."
- subprime mortgage crisis