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Thursday, July 17, 2008

Crude Oil Plummets...But

Crude oil tumbled for the third day in a row and dropped below $130 per barrel for the first time since June.

Oil prices fell below $130 a barrel for the first time in more than a month Thursday, as a dramatic slide entered a third day along with a sharp sell-off in natural gas.

The declines accelerated amid growing concerns about the weakening U.S. economy.
"The entire buillish scenario ... is starting to crack," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and

Light, sweet crude for August delivery dropped $5.31 to settle at $129.29 a barrel on the New York Mercantile Exchange. Prices have fallen more than $15 in just the past three days

Now in the great book, Liar's Poker, Michael Lewis describes an incident in which he is speaking on the phone with his mentor. The market was making a significant move upwards that entire day and he asked his mentor why it was happening. His mentor replied that a Saudi Sheik had been putting a substantial investment in the market that day. Lewis inquired as to the veracity of that statement. His mentor scolded him and told him that whenever the market makes a move that no one can explain it is always explained by significant investments from a Saudi Sheik.

So, if you ask me why oil has been plummetting over the last three days, I will tell you that a Saudi Sheik has been moving his money out of oil. That won't stop other so called experts from chiming in though. Here is how the article explained it.

Oil prices fell more than $10 over the previous two days on growing concerns that inflation and other economic concerns could reduce demand for crude. A surprisingly large gain in oil and refined fuel inventories in the U.S. prolonged the sell-off, because it suggested more supplies were heading into storage rather than consumers' fuel tanks.

Of course, if you read the conservative media, you will believe that oil fell because Bush announced the end of the moratorium on off shore drilling...

In a dramatic move yesterday President Bush removed the executive-branch moratorium on offshore drilling. Today, at a news conference, Bush repeated his new position, and slammed the Democratic Congress for not removing the congressional moratorium on the Outer Continental Shelf and elsewhere. Crude-oil futures for August delivery plunged $9.26, or 6.3 percent, almost immediately as Bush was speaking, bringing the barrel price down to $136.

My money is still on the Saudi Sheik. That said, if in fact, oil is falling because of fears over the economy, it is high oil prices causing those fears. If it continues to fall then the fears will go away and so will the drop in oil prices.

Furthermore, our government, on both sides, is failing in their understanding of market dynamics. Whatever the reason for the precipitous fall in oil prices, it gives us a great opportunity to ride a technical wave. Right now, the techical pressure is downward. The government should be using this opportunity to put as much downward pressure on the market as possible. That would create a so called vicious selling cycle.

Of course, there is plenty that the government could right now to put downward pressure on the market and neither side is doing any of it. For instance, Nancy Pelosi buried a bill today that would have allowed off shore drilling. Had she made an issue of bringing this bill to the floor, that would have sent another signal to the market that oil was heading down. President Bush continues to resist releasing the strategic oil reserve onto the open market. Such an announcement today would have also sent downward pressure on the market.

Had we had both these announcements TODAY, along with the current downward pressure, oil might have dropped below $100 per barrel. Instead, the government is sitting on its hands at the exact time when it is most critical they act. Whatever the reason for the drop, I don't believe that it is long term, and technical trading can turn on a dime. Now is the time to seize the moment and put maximum effort into moving oil down and unfortunately our government is sitting idly by.

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