Are oil prices cruising for a bruising?
BY DAVID ROEDER email@example.com August 31, 2012 8:31PM
**ADVANCE FOR RELEASE WEEKEND OF JULY 5-6** FILE ** In this March 28, 2006 file photo, the Discoverer Deep Seas drillship sits on station off the coast of Louisiana as Chevron drills for oil in the Gulf of Mexico. President Bush is renewing his call to open U.S. coastal waters to oil and gas development, arguing that it's high time to battle high prices with increased domestic production. He is planning to ask Congress on Wednesday, June 18, 2008, to lift the drilling moratoria that have been in effect since 1981 in more than 80 percent of the country's Outer Continental Shelf and to let states help to decide where to allow drilling. (AP Photo/Alex Brandon, File)
David Roeder reports on real estate at 6:22 p.m. every Thursday on WBBM-AM (780) and WBBM-FM (105.9). The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday
Updated: September 2, 2012 2:45AM
As you gas up the car this holiday weekend, paying prices many view as extortionate, take comfort in the outlook of some that oil prices can’t go on at their high levels.
A commodities analyst at Elliot Wave International, Jeff Kennedy, has taken to the Web in recent weeks to proclaim that an oil “crash” is coming. He has said that the per-barrel price, currently $97.51, could test the December 2008 low of less than $33.
Others aren’t so dramatic but think prices will slide, providing relief at the pump later this year. Reasons include the likelihood of a global economic slowdown — even China is beginning to look winded — sharply higher production in the U.S., a shift to higher-mileage cars and heavy trucks that run on natural gas and even Saudi Arabia’s supposedly selfish reasons to keep on pumping as prices fall.
“I don’t like to use the word ‘bubble,’ but could prices collapse somewhat in the near future? I think yes,” said Phil Flynn, analyst with Price Futures Group in Chicago.
Flynn said some transitory factors are supporting the price of oil. Prices in the Midwest, he noted, have jumped on refinery and pipeline disruptions, and some production was shut down for Hurricane Isaac.
Confidence in the Federal Reserve’s determination to help the economy is another influence. “There is a lot of Fed stimulus in the price of oil,” Flynn said.
But he sees changes in domestic demand as having a long-term downward pull on prices. Flynn said the United States is “changing history” with its use of shale oil reserves and enhanced production of natural gas. “We’ve seen buses that run on natural gas and that’s only going to grow in the coming years,” he said.
For consumers, immediate help should arrive in a couple of weeks as gas stations drop a mandated summer grade of fuel that is more expensive. Flynn said the switch alone should take 10 cents to 15 cents off the per-gallon price, which has topped $4.50 a gallon at many Chicago stations.
Oil industry analyst Philip Verleger has argued in some publications that Saudi Arabia has every incentive to be generous with oil production. He thinks the Saudis want to out-muscle Russia and Iran in the market and are terrified of the U.S. production boom. Lower prices could make the domestic production push uneconomical and win the oil kingdom friends in Washington.
Verleger told writer Steve LeVine in Foreign Policy that oil could be $40 a barrel by November.
Richard Ilczyszyn, founder of Iitrader.com, dissents from the talk of a crash, although he agrees the current price doesn’t make sense. He said oil “is not a supply-and-demand trade right now.” The market is reacting to sentiment involving currencies and any weakness in the dollar tends to push oil prices higher, Ilczyszyn said. “Nobody is willing to commit to the short side of the oil trade,” he said.
If Americans want lower gas prices, they should push companies to modernize refineries, Ilczyszyn said, something that hasn’t been done in decades.
Times change. The desire to find the ultimate clue for stock market direction doesn’t. In the past, some in the market used Time magazine as a contrary indicator: If the market made the cover of Time, then whatever trend was being covered, be it bullish or bearish, was treated as played out.
Instead of Time, how about the Drudge Report? Bespoke Investment Group said it’s found that the appearance of a financial headline as Drudge’s top story is a reliable indicator of a “bottom” in stocks. Bespoke co-founder Paul Hickey told Yahoo Finance that whenever a preponderance of scary financial stories lead the Drudge Report, markets usually follow with a rally. The most recent example, he said, was in June, when Europe re-emerged as a worry.
“What the takeaway is, is that once Drudge is talking about it [a financial story], and everyone is talking about it, then the market has digested it,” Hickey told the website.
HYPERBULL: “Reach goals beyond your goals,” reads the ad for a two-year CD at CIT Bank. Yes, that 1.25 percent APR makes dreams come true, provided your dream is buying a cup of coffee now and then.
CLOSING QUOTE: “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on the economy that could last for many years.” — Ben Bernanke, chairman, Federal Reserve, at its Jackson Hole, Wyo., retreat last week