Market Fundamentals Alone Do Not Explain the Current High Prices

Both short term and long term fundamentals had been essentially constant over the past six years. The short term measure most frequently cited is spare OPEC capacity. While it has fluctuated, it shows no significant downward trend. In fact, over this period, the correlation between excess capacity and price is positive, not negative; which is, of course backwards.

Similarly, the best long-term measure of capacity – the reserve to consumption ratio – is also increasing slightly while prices are increasing. Again, upon close examination we find that the correlation is slightly positive, which is contrary to the claim and expectations. These oil market numbers do not include a doubling of biofuel production, representing a growth of about 1 million barrels per day, equal to about half of the OPEC excess capacity.