Oil Prices: The Trend Is Still Up

With the price of crude down from over $145 to about $115, all of the talk is that the rising price of oil has been contained by falling demand and a better dollar. Almost every one of the dynamics which took oil prices up are gone now.The cost of things like gas can go back to "normal".

Actually, most of the reasons for higher oil still exist. There has been no increase in production. If consumption has dropped in China and other parts of the developing world that trend is temporary. The growth they will need to be large exporters over the next decade will still require the use of tremendous amounts of crude.

If the conflict in Georgia becomes more severe. oil supply out of that part of the world could be cut for an indefinite period.

The International Energy Agency is not backing down on its argument that the general direction of crude oil prices is up. The agency estimates demand for oil will rise 1.1% next year. According to MarketWatch, "the IEA warned against complacency on prices, saying it’s too early to cite a sea change in the market when there a number of warning signs."

Perceptions of what would happen to the price of oil turned on a dime early this year. First analysts said crude could hit $100 a barrel. Then estimates moved up to $120 and $150. As oil pushed near the $150 level, the predictions moved to $200 by the end of 2008.

The prevailing opinions have now turned 180 degrees. Predictions now point to oil dropping below $100. The stock market improvement over the last two weeks has depended on the falling price of oil as much as it has anything else. Corporate earnings certainly did not bring enough cheer to lever up a rally.

Predicting oil prices has become like weather forecasting. People have put away their umbrellas but it is likely to rain again.

Douglas A. McIntyre