Oil is down, hurrah! We’re celebrating at Oil Energy Money not because we can drive our SUV’s again, or take long distance flights, but because we’ll soon find the answer to a question everyone’s been asking: How much should oil cost?
Right now NYMEX crude futures are hovering around $93, down from a peak of $102 yesterday. Prices are down due to a decline in demand at home-Americans consumed 19.02m b/d over the last four weeks, a 7.1% decrease from last year. This low demand should be sustained through the winter due to the Recent Financial Crisis (bla bla bla, you know the details). Inversely, supply is healthy due to refineries coming back online after the hurricane season. The operational aspects seem stable.
Financially, as armchair speculators get burnt out of the market and the financial sector stablises, investors will return to high return equities markets and reduce oil trading, thus reducing oil’s sensitivity to the markets (one such measure of sensitivity is Beta). Prices should then refocus on core relationships between major producers, buyers and institutional traders.
With all things being equal, the laws of supply and demand should create a trend towards the equilibrium price of oil.
How long will this take? Several months at least-for investor confidence to return and the media to reduce its focus on commodities. Gold will probably see a similar effect as speculators move back to equities en masse.
This entire argument is highly speculative but the fundamentals seem sound. Oil’s fifteen minutes of fame are slowly passing and as we head in to winter the price should decrease. Whether it’ll go down low enough to average $70 is unlikely but Oil Energy Money would not be shocked to see prices hit $80 before the year is out.
