Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder

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I have stated since the beginning of the year that the price of crude oil would soar to the $100/barrel range this year. Although the price of crude has fallen off slightly at present, it will eventually recover to the $100 level and then go on to hit $150 sometime in 2008.

At the height of the super weak yen phase (147 yen to the dollar) back in 1998, my prediction that the Japanese unit would rise to 110 yen/dollar in early October this year turned out to be right on the mark. This is because I closely identified the yen carry trade trend being pursued by hedge funds at that time. So, too, with the recent sharp rise in the price of crude oil from September;, the single greatest reason for my calculation that crude would reach $100 was the "technical positions" on the New York Mercantile Exchange (NYMEX) crude oil futures market.

While on the subject of the market, the general tightness of actual demand in China, India and other countries is viewed as the reason for the steep rise in crude. I don't use such macro information in forming my own short-term projections. On the NYMEX, while there are about 1.3 million open contracts on crude futures (one contract = 1,000 barrels), there are some 2.5 million options. This trend has continued since September, with speculators who have sold off large volumes of call options coming under pressure to purchase hedges each time their strike prices near $80, $90 or $95. Against the backdrop of this vacuum-like environment, the price of crude oil has continued to climb rapidly. More recently, I also predicted that crude would reach $100 by year's end during a seminar in Hawaii on September 5, at the Japan Association of Corporate Executives on September 12, and then again at a private study group on September 26.

I imagine that readers of this column would like to know if the price of crude is going to be brought under control in the future. My answer to that question is: "The price will be temporarily controlled, and then it will increase sharply after that." In reality, macro information is much like a series of body blows, which slowly and steadily takes their toll. Other factors pushing up crude prices, in addition to the tight state of actual demand in China and India, is the impact of very limited oil refining capacity and a short supply of heating oil inventory in the United States. The U.S. economy is growing dependent on exports; particularly on expanding market opportunities in newly emerging nations. America has high hopes for these emerging markets, but the impact of high crude prices on these emerging countries - which are noticeably lagging behind in their energy efficiency - may significantly limit their power to purchase U.S. exports. If this comes to pass, the shift in speculative money to commodity markets seen up to now will continue, and become a factor that pushes up the price of crude.

There are also geopolitical factors at work. This refers to the situation in the Middle East, a subject on which I comment on a regular basis. With the underlying motives of the Middle East peace policy of U.S. President George W. Bush being to isolate Iran, we can expect the tensions between Israel and Iran to escalate to extreme heights by the U.S. Presidential election in November 2008. Furthermore, any emergency on the narrow Strait of Hormuz would be a factor that also triggers a jump in the price of crude. The body blows of macro information are generally as described, although there are also uppercuts concealed in this equation. On the NYMEX, for example, call transactions for $200 are already starting to appear.

I am sometimes scolded when making this or that projection, with many telling me to "stop talking nonsense." As far as the national interests of Japan are concerned, however, it may actually be better if, around the end of next year, I do indeed find myself forced to apologize for these or other "rash" comments.