Posted on 05/24/2008 9:24:38 AM PDT by BenLurkin
Oil is up 30 percent in three months after peaking above $135 today following this week's ho-hum report on U.S. supplies. The general sentiment among investors, even in commodity pits, is that there may still be room to rise, with analysts predicting oil could top $200 a barrel over the next couple of years--if not earlier. But just as there is a seller for every buyer, there is a bear case for every bull case. So here are a few scenarios that could push prices back down:
1. Investors pull back.
Institutional investors--pension funds, hedge funds, sovereign wealth funds--could decide commodities are a less attractive proposition and take profits after a year of record-breaking price increases. "The market could fall under its own weight in the near term. You've got to question how much more money can come into these markets at this point in time," says Eric Wittenauer, an energy futures analyst at A.G. Edwards.
Probability: Unconvincing. The argument could have been made at $100 a barrel too, Wittenauer says. Or $110, or $120...
2. The dollar gains.
The greenback recovery is far from assured, but for now it has managed to bounce off mid-March lows. The U.S. Dollar Index hit a yearly low of 70.96 on March 14 and has since recovered to a bit above 72. But that improvement hasn't been enough to stop crude's rise, even as hopes for a bottom to the dollar's decline improve as the Federal Reserve decides to end two years of rate cutting. It might take a move by the G-7 countries to support the dollar. G-7 officials "talked up" the currency a bit after their April 11 meeting following the blowup of Bear Stearns. It's not clear they'll do more talking soon. "We're going to have to see some strength in the dollar to pull some of this investment money out of oil," says Darin Newsom, a commodity analyst at DTN.
Probability: Possible.
3. The Olympics end.
This may sound strange, but once the torch is extinguished following the Beijing games, crude could get a break. That's because in the run-up to the games, China has continued to demand an ever growing flow of diesel fuel. That in turn puts upward pressure on the cost of other distillates like heating oil and jet fuel. "The most important thing we could see is foreign diesel demand begins to slow. If that happens, it'll kick out one of the major supports underneath the crude market at this time," Newsom says.
Probability: Moderate. There are signs the superheated Chinese economy may be cooling ever so slightly, though its long-term expansion probably means more strident competition for almost all commodities.
4. Production increases.
OPEC could boost production, but not by much. It blames the falling dollar and speculators for the surge in prices. President Bush urged production hikes in his recent visit to the Middle East, but analysts warn a short-term fix by turning on the tap won't correct the demand side of the equation. Saudi Arabia, home to the world's largest reserves, is pumping at full capacity. A big new find like the one off the coast of Brazil could help, but those are long-term worries because of billions of necessary investment in order to extract a single barrel. "OPEC is operating with little or no spare capacity," Wittenauer says.
Probability: Unlikely.
5. Domestic demand declines.
Americans are heading into the summer driving season. High prices mean that, compared with a year ago, Americans have pumped 1.4 percent less gasoline in 2008. But that's not enough to bring costs down, according to a weekly consumption survey by MasterCard Advisors. A seasonal pullback could come after a normal two-week rally in prices leading up to Memorial Day, but they'd be likely to rebound ahead of the July 4 holiday. Conservation efforts--rather than gas tax holiday schemes offered by Sens. John McCain and Hillary Clinton--would have to be stepped up substantially to really help dampen crude prices.
Probability: Unlikely.
6. Other markets calm down.
Right now, most analysts agree oil is out of synch with supply-and-demand fundamentals (though they disagree on just how much). Investors are scouring the globe for yield at a time when stocks are floundering, bond yields are paltry, and the American economy is uncertain at best. In times like these, everything from gold to oil looks both attractive and safe. To be coaxed back into the broader market, traders still need to see an end to the credit crunch and regain some faith in both the global financial system and the health of the U.S. consumer before abandoning one of the few profitable corners of the market.
Probability: Moderate. Markets seem to believe that the Federal Reserve has headed off the worst of the financial crisis. Equities have recovered a bit, though slower consumer spending and falling home prices are still the biggest unanswered questions.
The bad news, however, is that most analysts believe that crude moving higher is the most likely outcome, and even if any of the above breaks are supplied, the pullback in price could be 15 to 20 percent at the most. That would still leave oil at well over $100 a barrel. Most analysts are solidly bullish on the price of crude through what could be a long summer for American drivers.
Kind of reminds me of the Beannie Baby thing back in the 90s. Now you can’t give the things away.
Their answer...”Yeah but not before you run out of money.”
Bingo!
The pressure this year is much higher. In order to drill and do many of the things needed to be done, people in government will have to change their votes on these issues. If they don’t change now, before and election, they will never change.
Your statement makes a lot of sense.
I have been thinking about the Chinese demand lately. It is my understanding that the government is subsidizing gasoline. It gives the appearance of progress for the people. I do wonder when the olympics are over and there is less attention on China as whole if this policy will continue. There probably is a segment of the Chinese population who would have to abandon there cars.
Don’t forget the earthquakes, though. China is likely to have an ongoing need for fuel brcause there whole towns/cities to rebuild.
The OPEC embargo of the late '70s and early 80s ended because we were making progress. There were roughly 4500 rigs drilling and oil shale research was promising then.
Rather than raise their price, they crashed it, guaranteeing that alternative energy would not be economical and collapsing our domestic oil industry.
If they could do the same, if they credibly believed we would do something besides wring our hands, and if they have the surplus capacity, they would do the same thing again.
This time, though, they have not imposed the shortfall in marginal supply so much as demand has, and while they could raise the price through reducing production, they cannot crash it through producing significantly more.
The effect of that is that they will become less important in the market as pressure on our politicians increases to open up more areas, and huge grants are let to find and refine alternatives to make them sufficiently economical to compete.
When we (or exporting countries friendly to us) can produce enough to affect the margin, the price will come down.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.