Crude fell from $77 to $60 now. Experts say it wil fall to $40/barrel. This is though to believe. Opinions?

Question

Reasons I disagree w/ the experts:
- Increasing population and industrialization of China and India.
- War on terrorism (in general).
- Iran sabre rattling and close to having nukes (1 specific example).

Answer 1

I agree with your views. Think about it, India and China have come online as major energy consumers. China is striking deals with countries producing energy products to supply their great need. When 1/3 of the worlds population (2 billion people) are demanding more energy, prices will go up. But, why have energy prices gone down?

Bill King of the King report shed some light on the subject and I agree with him. On July 12, Goldman Sachs "tweaked" the composition of their Goldman Sachs Commodity Index (GSCI). Now interestingly enough two pension funds (PGGM and ABP, two of the largest) are benchmarked to the GSCI (ABP manages $155 billion and PGGM $50 billion). When Goldman revised their GSCI composition, unleaded gasoline accounted for 8.45% of the index which was adjusted down to 2.30% of the index. This probably induced arbs, commerical hedgers and other large traders to sell Sept. & Oct. contracts to avoid possible settlement and delivery problems.

When hundreds of billions of dollars are sold in the energy markets, guess what, the price will drop. Now think about this; Henry Paulson, who was just recently put into the position of Treasury Secretary (replacing Snow) by Bush is a former Goldman VP. The timing on the reallocation of the GSCI index was timed perfectly to induce selling of energy contracts to avoid potential delivery and settlement problems --- just in time for the November elections.

What fundamentals have changed that would cause oil to go down? Nothing. The threat of an Iran war is still there. Demand is still high from the U.S. as well as China & India. There are no fundamentals indicating that oil should be falling. But a reindexing of a benchmark commodities index inducing massive selling of energy contracts coupled with the fact that the index is from the firm that the current Treasury Secretary was from and he's put into that position by a Republican President with the very real possibility that the Repubs will lose seats and control of congress - to me this makes a lot of sense. Mind you, I'm not a Democrat or a Repub.

How much you want to be that after the elections, energy prices will head back up?

Answer 2

Crude oil is now at $62.00 It is easier for crude to go up to pass $70.00 again, due to some disruptions in supply or perceptions about disruptions in supply whether due to political flare-ups or technical reasons such as BP's pipeline leak-than to go down. The reason is that Demand is consistently strong overall worldwide and will not go down much, because of fast growing economies like China and India. But due to the physical inability to increase supply at short notice [which is an inherent property of raw materials and commodities which require an investment in production infrastructure and a long gestation period between 'sowing' and 'reaping'] prices cannot go down much. Also, OPEC has the ability to restrict supply and keep the price up. My guess is that they will not allow oil to go below $50 perbarrel

Answer 3

Well, I probably agree with you, but I hope we are both wrong.

My number one on my list would be OPEC cutting back a lot more on production.
Lack of hurricanes in the US has helped a lot. And I think we are using less gas, we need to conserve more!

There are too many factors invoved and you touched on 3 important ones. But this stuff is like reading tea leave to an extent.
I think the prices will continue to go down in the short term, but not to $40, opec won't let that happen.
We need to conserve more and develop real alt fuels, not this corn fuel window dressing stuff either!

Answer 4

We have multi year high inventories of oil and natural gas, slowing economies, and drilling is still going on at a pretty good pace. Energy is a cyclical business. Barring any geopolitical factors heating up again I wouldnt doubt oil will go lower. Maybe into the 40s or even lower.

Answer 5

Today's price on the NY MEX for crude futures was $62.07. I had not been paying attention and was stunned. I agree with you that this is short term volatility and that the longer term will be upwards.
One thing that the markets don't like is uncertainty, and we have plenty of that.

Answer 6

OPEC is already moving to prevent this, and beginning to limit production. Won't happen.