Energy Business

As Oil Breaks $120, Traders Looking Lower

Oil_well_logo_2Does it seem odd that oil prices have continued to fall despite a fairly rapid tropical storm in the Gulf of Mexico developed over the weekend, while a Valero plant had a minimal outage because of a small contained explosion at a 130,000 barrel per day facility?  What if you added in the Iranian saber rattling about retaliatory threats that infer the potential closure of the Strait of Hormuz?

Wasn’t it just a couple of weeks ago when we were all being prepared to stomach the thought of $150 or even much higher oil prices?

Regardless of what the intuition may have been, traders have run thecalculations on outages and tried to factor in near-term disruptionsversus the supply and demand scenarios. That is the sound of aspeculative bubble rapidly deflating. Does that sound like a suddenbubble pop considering the rise?  No it doesn’t.  But all thegovernment and private inquiries into speculation alongside somelegitimate beginnings of demand erosion and this is indicative of arapidly deflating bubble.

That isn’t a bet that the prices will never rise again, but unlessthere is a legitimate event rather than the threat or worry of an eventthe the trend for lower prices looks in tact.  Is it a huge leg downcoming?  You can’t say without a crystal ball.  Traders are not lookingfor an immediate fall to continue but the next major leg down could see$117 to $115 before technicians start chiming in.  Based upon recentand past trading history, a sharp and sudden move straight down tothose next support levels is likely no sure thing.

Whatever the real value of oil is may never really be known.  When speculators are taken at face value saying that prices aren’t higher because of speculation and when local supply availability exceeds shortfalls, trying to predict exact prices or anything other than the trends just becomes a sucker’s bet.

Jon C. Ogg
August 4, 2008