Oil To $60, Speculation On The Way Down

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Two months ago, it was unimaginable that crude could drop below $100. The stink of $147 oil was still in the air. Eulogies for the car and airline industries were being written. The average citizen was eating Velveeta and Spam to save money for gas.

Crude dropped as low as $95 over night and there is now plenty of guessing that it could move as low as $80 in the coming months.

The first set of dynamics is in place to push crude much further down.

Many economists are now predicting a deep and long recession in the US and EU. That should sharply undercut the use of oil for gas, diesel, and petrochemicals. At the same time off-shore drilling is back in vogue and T. Boone Pickens is building windmills on top of outhouses throughout the West.

The dominoes would then begin to fall rapidly. Demand for exports from China would throttle back. That would cut the demand for crude in the world’s most populated country. A recession there would drive demand down even more.

The wild card in the drop in oil is the force of speculation. The issue of speculative activities pushing oil prices up has been investigated by Congress and several regulatory bodies. Some have found only modest effects from gambling on prices. Others claim that a tremendous amount of the run-up was due to professional investors going long.

The same system would work as oil moves down. Investors may not be able to short financial stocks, but they can short crude and will try to borrow money to leverage those bets. If oil’s natural supply-and-demand level is $80 at the end of the year, speculation could drive it down much further.

Who says oil cannot fall to $60?

Douglas A. McIntyre