Oil then traded at less than $60 a barrel and was not really making any headlines, but a few months can change everything. Now everyone has a forecast and is jumping on the oil bandwagon.

I remain bullish long term on oil and commodities. However, the last few weeks just don’t seem right to me. When everything seems so bullish, you normally know it’s time for a fall. My fair-value studies show that $70 would be around the correct level. That’s still well up for the year. Yes we can get to $120 a barrel and stay above that level, but it’s not time yet. Of course, the weaker US dollar makes the value of a barrel of oil cheaper in pounds and euros, but the current price still does not stack up.

Misleading movements
To me this is a speculative run-up rather than a true dramatic fundamental change. We know China and India are rapidly devouring oil, but this has been known for years. I’m concerned by the move since August 2007. What has changed so dramatically in the past few months that is worth a 35 per cent increase?

Many observers say oil supplies are tight; I disagree. Oil is plentiful and just a few months ago we had too much of it in Cushing, where US West Texas Intermediate (WTI) is stored. This caused Brent Crude to trade out of step with US WTI. While the Organization of Petroleum Exporting Countries (OPEC) is the most popular indicator of oil supply, one has to remember that countries such as Russia, Mexico, the USA, the UK and Norway are not in OPEC and have free will to pump and sell as much as possible. Longer term, I agree that we will have to live with higher oil prices but I am talking about the next few months here, not the next decade.

It’s interesting that major financial institutions are now becoming physical oil holders. JPMorgan and Goldman Sachs don’t just trade futures, they actually take delivery of oil and have access to huge oil and gas tankers. If a contract comes to expiration at a price they deem is too low, they can take delivery of the oil, store it and sell it on in due course.

The oil market is relatively unregulated and it’s not hard for a big oil player to manipulate the market as required. Recent large losses by many hedge funds and investment banks in sub-prime markets are leading them to make bets in other markets to make up lost income. Right now, energy is a very hot market, with these big players using complicated derivatives and their storage capacity.

Many financial institutions have called on OPEC to release more oil, but, as it correctly stated, this would not bring the price down, since it doesn’t control the market.

Can we adopt a contra view?
If you want to back this idea, I suggest using covered warrants, not spread bets, and I only advise you to put a small amount of risk money into this idea. Right now, you can buy an SG covered Warrant with a 10 June 2008 expiration date at around 2.5p. The strike price is $60 and this is Brent Oil. The current Brent is trading at around $93. If Brent hits $70 between now and the end of March 2008, then this warrant will be worth around 7p, giving a massive gain of over 170 per cent. Obviously, if it starts getting closer to June and oil goes higher or remains around these levels then your warrant will be worth zero and your premium will be lost. It is going to be interesting to see how this plays out, but my bet is that oil will be nearer to $70 than $100 in the next few months.