Despite talk of oil shortages, the reality is a glut. Rising crude supplies have prompted Saudi Arabia to cut production. Higher energy prices have also damped demand. Last year, U.S. oil consumption fell for the first time. China's growing appetite for oil has also slowed.
Geopolitical risks can't explain the current oil price. The probability of an interruption to Middle East supplies justifies about an additional $11 to the oil price, according to Goldman Sachs. Adding that to Mr. Miller's pessimistic forecast would suggest a reasonable price for oil of about $50.
It seems that demand from investors is largely responsible for today's inflated oil price. Flows into commodity indices, which are weighted heavily in oil, have surged eightfold over the past three years. This has pushed up the price of oil futures, making it profitable for traders to sell the futures and take physical delivery of oil, which they pay to store.Back in the real world, oil supply is outstripping demand. If production continues at its current pace, the world will run out of storage space within six months, says research firm Sanford Bernstein. If that happens, the cost of storing oil would soar. Traders would no longer make money by hoarding the stuff. Without their demand, both the oil price and energy stocks could tumble.
This was from an article in the WSJ about Bill Miller.