Crude Oil Prices Continue To Buckle

As a follow up to my blog last week, it is interesting to see oil dropped below $126 a barrel due to fear that prices are cutting into demand and concerns about a probe into futures trading by a U.S. regulator. Light, sweet crude for July delivery was down $1.81 to $125.54 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. On Friday, the contract settled at $127.35 a barrel, up 73 cents after dipping below $125 and then rebounding. July Brent crude futures fell $1.27 to $126.51 a barrel on the ICE Futures exchange in London.

In the U.S., which has just started its summer driving season, there is a real concern about record high fuel and energy prices. This has helped to bring oil down from the $135.09 a barrel trading record hit May 22. Data from the U.S. Energy Department and Federal Highway Administration and several surveys in recent days suggest American consumers are driving less.

The decision by some countries in Asia, like Indonesia and Taiwan, to lower subsidies on oil products, also was seen as having a bearish effect on the market. Additional selling pressure came with last week's announcement from the Commodity Futures Trading Commission about an investigation into possible price manipulation in oil futures markets. The commission also announced new rules designed to increase transparency of U.S. and international energy futures markets.

"There are more concerns on the high pricing we have seen, that it will have a negative impact on demand, and the fact that the CFTC is expanding its investigation of manipulation in the oil markets," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The seesaw we've seen in the last few days is an indication that the oil market may have peaked," Shum said. "Having said that ... the reality is that even though we have crude off the peak of $135 there are still supply-side issues going forward," he said. "The hurricane season is certainly one factor to contend with."

Tropical Storm Arthur formed Saturday afternoon, one day before the official start of the 2008 Atlantic Hurricane season, and though it caused the temporary closure of two of Mexico's oil export ports, it wasn't expected to cause any severe disruptions to oil shipments. On Sunday, the storm weakened to a tropical depression. "Tropical storm Arthur, the first of this season, gave more support to the market," said a research note by JBC Energy in Vienna, Austria.

Investors also had other supply worries on their mind. On a trip to the Mideast over the weekend, U.S. Treasury Secretary Henry Paulson said there is "no quick fix" to high oil prices because it is an issue of supply and demand. He was on the trip to deliver a message to officials of Saudi Arabia and other oil-producing nations that soaring oil prices are putting a burden on the global economy.

Global demand remains strong while "production capacity has not seen new development," Paulson said Sunday in Qatar. His trip was designed to urge Mideast producers to allow more outside investment to boost output. The day before, though, the current president of the Organization of Petroleum Exporting Countries again blamed the weak U.S. dollar, speculation and the subprime crisis for the spiraling price of oil. Algerian Energy Minister Chakib Khelil said the cartel will make no new decision on production levels until its Sept. 9 meeting in Vienna. He said oil's record prices do not reflect markets conditions, an oft-repeated OPEC position.

As you can see from the various points made here, most of the blame for high energy prices is being blamed on the weakened dollar and global demand. If global demand falters as it has in the US, the resulting supply increase could be just the stimulus to send oil prices tumbling. This would also result in a strengthened dollar against global currencies, which is probably the most important factor necessary to bring relief from high oil prices. Unfortunately, any supply disruptions will bring the oil bulls out in force.

John Kaighn

Jersey Benefits Advisors

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