Democrats.Worst.Nightmare.
Posted on 09/13/2006 6:56:52 PM PDT by Flavius
WASHINGTON - The recent sharp drop in the global price of crude oil could mark the start of a massive sell-off that returns gasoline prices to lows not seen since the late 1990s - perhaps as low as $1.15 a gallon.
"All the hurricane flags are flying" in oil markets, said Philip K. Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar. Now, he tells McClatchy Newspapers, they appear to be poised for a dramatic plunge.
Crude oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40. After falling seven straight days, they rose slightly Wednesday in trading on the New York Mercantile Exchange, to $63.97, partly in reaction to a government report showing fuel inventories a bit lower than expected. But the overall price drop is expected to continue, and prices could fall much more in the weeks and months ahead.
Here's why.
For most of the past two years, oil prices have risen because the world's oil producers have struggled to keep pace with growing demand, particularly from China and India. Spare oil production capacity grew so tight that market players feared that any disruption to oil production could create shortages.
Fear of disruption focused on fighting in Nigeria, escalating tensions over Iran's nuclear program, violence between Israel and Lebanon that might spread to oil-producing neighbors, and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.
Oil traders bet that such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Financial players, such as large pension and commodities funds, are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.
That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.
But many of the conditions that drove investors to bid up oil prices are ebbing. Tensions over Israel, Lebanon and Nigeria are easing. The hurricane season has presented no threat so far to the Gulf of Mexico. The U.S. peak summer driving season is over, so gasoline demand is falling.
With fear of supply disruptions ebbing, oil prices began sliding. With oil inventories high, refiners that turn oil into gasoline are expected to cut production. As refiners cut production, oil companies increasingly risk getting stuck with excess oil supplies. There's already anecdotal evidence of oil companies chartering tankers to store excess oil.
All this is turning financial markets increasingly bearish on oil.
"If we continue to build inventories, and if we have a warm winter like we had last winter, you could see a large fall in the price of oil," said Gary Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge fund. "I think there is still a lot of risk in the market."
As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59, according to the AAA motor club.
Should oil traders fear that this downward price spiral will get worse and run for the exits by selling off their futures contracts, said Verleger, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.
Other experts won't guess at a floor price, but they agree that a race to the bottom could break out.
"The market may test levels here that are too low to be sustained," said Clay Seigle, an analyst at Cambridge Energy Research Associates, a consultancy in Boston.
On Monday, the oil-producing cartel OPEC hinted that if prices fall precipitously, OPEC members would cut production to lift them. But that would take time.
"That takes six to nine months. If we don't have a really cold winter here (creating a demand for oil), prices will fall. Literally, you don't know where the floor is," said Verleger. "In a market like this, if things start falling ... prices could take you back to the 1999 levels. It has nothing to do with production."
Thank God Karl Rove timed his market manipulations perfectly for the midterms.
Where's that "Rove, you magnificent bastard!" pic at?
Oil starts up and the "experts" tell us gas will top $4/gal.
Oil starts down and the same "experts" tell us gas will drop to $1/gal.
yes, I know its good news.
but you see how the "artificial forces" in this market make it impossible for new investments in supply and alternatives to get off the ground. alot of these new investments are based on, let's say $50 oil. so when they take it down to $35, they essentially bankrupt all that new investment - leaving the same old players in control, to run it up to $75 again.
$oro$ is feeling the pain right about now. Oil prices are in an absolute Free Fall. Should be a nice winter.
Pray for W and Our Freedom Fighters
Time to dump my position in the energy markets. This will also likely screw the funding for alternative energy resource development. Shortsighted I realize but low oil prices make it far more cost comeptitive than solar, wind, etc
Real story: OPEC has enjoyed a long period of high prices. Stable high prices encourage alternate supplies. Prices need to occassionally fall in order to crush alternate suppliers financially so that they will not become a threat to OPEC
What's good for America is bad for the Dims.
Are we talking $1.15/gal wholesale??
Democrats.Worst.Nightmare.
If he gets something like that wrong, how much would I find if I looked a little more?
well of course, this is always how they cut the legs out from under such investments.
If you aren't out, I would say get out this week...or don't bother.
Starting just before the first hurricane last year, I started storing my own 3-month supply of fuel (Diesel). Since the oil companies don't keep nearly as large a reserve on hand to damp out wild swings in price supply and demand as they used to, I now have to do it myself. At this point I still have ~5 weeks of supply. I think I'll wait at least a couple of weeks before any buying.
familyop to Kevin G. Hall (author of the piece):
You so funny!
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