Publications: Notes at the Margin

Irrational Exuberance? (May 26, 2020)


The former Federal Reserve chairman Alan Greenspan spoke the phrase "irrational exuberance" once in a speech to investors in New York almost twenty-two years ago.[1] Four years after the talk, Yale economist and Nobel laureate Robert Shiller made the words famous by using them to title a book that is now in its fifth edition.[2] Today, we ask the question, "Have oil markets become irrationally exuberant?"


We ask this because crude oil prices have increased by one hundred forty-eight percent from their April 21 lows (for Brent). The rise is way overblown if one’s thinking is data-driven. Models and much of the available key data suggest prices should still be in the teens or lower. Furthermore, an econometric analysis of the shale supply response indicates that the almost four million barrel per day decline in US shale production we uncovered in the last weeks will be reversed in part with the price boost.


More specifically, the following critical fundamentals lead us to conclude that crude prices are probably much too high: 

  • Global crude and product inventories at record highs
  • Key domestic product inventories also at record highs
  • Excess returns to storage for gasoline, distillate, and gasoil at thirty-six-year highs
  • The divergence of total open interest in the three main crude futures contracts when option equivalent positions are included in the calculation from the open interest reported by the three major exchanges
  • Record high volatility in crude prices
  • Uncertain prospects for the US and global economies
  • Differing opinions regarding the recovery of US and world gasoline consumption

Each of these factors points to a likely sharp fall in crude prices.

[1] See Steven Russolillo, “Irrational Exuberance: Alan Greenspan’s Call, 20 Years Later,” The Wall Street Journal, December 3, 2016 [].

[2] Robert J. Shiller, Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000) []. 


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