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Tuesday, July 29, 2008

Oil Continues To Drop But Concerns Remain

Oil continued its steep decline dropping to its lowest value in seven weeks.

Oil prices tumbled to their lowest level in seven weeks Tuesday as a stronger dollar and beliefs that record prices are eroding the world's thirst for energy sparked another dramatic sell-off.

The drop — as much as $4 a barrel during the day — was a throwback to oil's nosedive over the past two weeks and outweighed supply concerns touched off by a militant attack Monday on two Nigerian crude pipelines. It was oil's seventh decline in the last 10 sessions.

Light, sweet crude for September delivery fell $1.89, or 1.52 percent, to $122.84 a barrel in early afternoon trading on the New York Mercantile Exchange. Earlier, prices fell to $120.42, the lowest level for a front-month contract since June 10; they have now fallen more than $25 from their trading high of $147.27, reached July 11.

The concern here continues to be the reason for the decline. According to the analysis (which is much more often inaccurate than accurate) this is due to dwindling demand. Of course, demand is dwindling because the price is so high. At some point the price won't be so high and demand will come back.

The good news is that it has found downward pressure on so called technical levels. This means that speculators will now be apt to try and make money driving the price down. As I said in an earlier post, speculators aren't always the enemy of the working man when it comes to oil. Speculators are trying to make money, period. They don't care if it is driving the price of oil up or down. Given that technically the momentum is down, it is very likely these same speculators are now playing oil the other way.

Still, it is quite frustrating to watch D.C. inactive at this moment. Now, is the time for legislators to cease the moment and signal to the market that we are serious about domestic oil production. That would put the perfect sort of downward pressure on oil on top of the pressure it is already feeling. Congress continues to stall any drilling initiatives. The President could drive oil down even further by merely threatening to release some of the oil reserve if oil doesn't hit a certain number. If the President played it right, he wouldn't even need to actually release any of the reserve. There is plenty our legislators can do right now to signal to the market that they are serious about domestic energy. If they did that, that would put even more downward pressure and we would see oil really tank. Instead, all domestic energy ideas are caught in the middle of partisan rankling.

If, in fact, the experts are right, and oil is dropping because demand has dropped, this is all temporary. At some point, prices will settle into something Americans will accept and they will begin to drive more again. Unless we step up with measures to increase supply, I firmly believe this drop in price is temporary.

1 comment:

Anonymous said...

"Unless we step up with measures to increase supply, I firmly believe this drop in price is temporary."

My instincts agree with this, but, my wishful thinking doesn't. Obviously measures need to be taken to seriously tackle this problem and Congressioanl gridlock is not the answer. The situation in D.C. is only more evidence of what government regulation in the free market causes. The American people are depending on their lawmakers to do their jobs and all we get from them is political pandering and inaction. Seems they are mroe concerned with steroids in professional baseball than our energy concerns.