In the last one month or so I have been writing a lot about the crude. Here are some of them.
Now in my opinion, a bubble exists when the present value of the stream of cash flows, that one expect to receive in the future, moves away from the price of the stock. In other words, a bubble exists when the fundamental value of an asset, deviates from the market price of that asset. One must understand that future cash flows are always uncertain. This is because market fundamentals are based on expectations regarding future events. No one can really predict the existence of a bubble, unless you have some sort of time machine or crystal ball with you.
It is difficult to say whether we are witnessing a bubble in oil markets, today. One can invest in an over-valued asset, if one has good reason to think that one can take the profits and run before the burst. The market fundamentals have changed. A 50 year old data is no longer relevant to the market at present or in the near future. In the historically point of view, commodities provided better returns, over long period of time than provided by equities. Also, the huge flow of cash into commodity features came basically from large institutional investors such as pension funds, university endowments etc. Those investments turn out to be fully collateralized and they are buy- and – hold investments type, for the long term.
One can rarely avoid bubbles and especially when they are based on stretched fundamentals. Crude oil prices have rushed ahead of fundamentals. Economists say that oil trade has risen some 20 times since 2002 and estimated to be some $5 tn. Also, light sweet crude volume in NYMEX has raised to some 40% since the previous year or so. Multiples in oil futures are up 10* to daily consumption. Several economic factors like supply issues, shortage worries, increased consumption, increased reserves by US are all responsible for inflating prices.