Oil is dropping, but why? - Political Forum

Oregon Elephant · 11-13-2007, 12:14 PM

Bloomberg.com: Energy Prices

As of now (12:02 pm East Coast Time) Crude Oil is trading under $92.00 a barrel (openned today at $94.62 a barrel). That is still pretty dang high, but the drop from it's high of over $97.00 a barrel just a few days ago. This trend won't last too long probably, but it would be nice to know what drove this near 5% drop so that we can repeat it.

From Economy 101, we know that prices are dictated by supply and demand. The supply went up all of a sudden, when Brazil found a huge amount of oil. This will naturally cause the price of oil to drop, unless Brazil decided not to drill it out which would cause it too skyrocket.

Oil discovery rocks Brazil - CNN.com

Slartibartfas · 11-13-2007, 01:58 PM

Quote:

Originally Posted by Oregon Elephant

Bloomberg.com: Energy Prices

As of now (12:02 pm East Coast Time) Crude Oil is trading under $92.00 a barrel (openned today at $94.62 a barrel). That is still pretty dang high, but the drop from it's high of over $97.00 a barrel just a few days ago. This trend won't last too long probably, but it would be nice to know what drove this near 5% drop so that we can repeat it.

From Economy 101, we know that prices are dictated by supply and demand. The supply went up all of a sudden, when Brazil found a huge amount of oil. This will naturally cause the price of oil to drop, unless Brazil decided not to drill it out which would cause it too skyrocket.

Oil discovery rocks Brazil - CNN.com

The prices are therefore dropping because what we saw the days before was a speculative bubble. Of course rising prices are fundamentally justified, but not that fast.

A correction back to what fundamentalist data justifies was foreseeable.

That does not mean that prices we will not reach the 100$ in the near future nonetheless. Just not that exaggeratedly fast, where every day made a difference.

Regarding Brazil. Well, this will take quite a while anyway, until they really can exploit that field. And even then it will rather only lower the increase of the oil price rather than lead to a decrease. I am not sure if there is a real fundamental connection between those news from Brazil and the oil price development of today. If there is a connection its rather speculative again, just in the other direction.

Oregon Elephant · 11-13-2007, 02:06 PM

Quote:

Originally Posted by Slartibartfas

The prices are therefore dropping because what we saw the days before was a speculative bubble. Of course rising prices are fundamentally justified, but not that fast.

A correction back to what fundamentalist data justifies was foreseeable.

That does not mean that prices we will not reach the 100$ in the near future nonetheless. Just not that exaggeratedly fast, where every day made a difference.

Regarding Brazil. Well, this will take quite a while anyway, until they really can exploit that field. And even then it will rather only lower the increase of the oil price rather than lead to a decrease. I am not sure if there is a real fundamental connection between those news from Brazil and the oil price development of today. If there is a connection its rather speculative again, just in the other direction.

Most likely, but the news of it surely had some influence on what people are willing to pay for oil. Oil has been this bad before, in 1979 and 1980 the cost of crude oil (with respect to current dollar values) reached just over $100 per barrel before nations began drilling like crazy to increase the supply to lower the cost. The is a good deal of oil in the US that we can't drill for (in the gulf of mexico and alaska) because of political reasons. If those reasons are lifted for the economy, we could see oil drop again (not as low as they did in the 80's, but to around 50-70 a barrel).

Oregon Elephant · 11-13-2007, 02:08 PM

At 2:07 pm East Coast Time, Oil is at $90.72 a barrel.

Tim · 11-13-2007, 02:50 PM

Slart is correct about the role of speculation. Business factors do not support $100 oil. The price of anything has to have some connection with the reality of demand. When that tie is broken, there can be a bubble, then a correction. That is what is happening now. It cannot be forced. Attempts by governments to control prices always result in inflation later on.

Saudi Arabia made a major mistake by cutting back on production earlier this year based on the assumption that the demand was falling. They were wrong in their assumption. Now they are trying to correct it with today's speech - but they are also attempting to be careful with words. They are not announcing a specific increase because that may produce a sudden drop in prices. It is a difficult game to play.

At the end of 1985, OPEC made one of the greatest mistakes in the history of commodity trading when they confused the world with their announcements. The price of oil crashed, losing two thirds of its price value in a few weeks. In turn, inflation dropped, interest rates around the world fell, the stock markets went into a bull run, and the great boom of 1986-1989 began - but oil producers went into a depression of their own. They are trying to be careful not to let that happen again.

Also, there are indications that the recent huge increase in prices is finally cutting demand. This means that there is a limit to what the world markets will put up with. This has not happened for many years. This is another factor pushing down prices.

Tim · 11-13-2007, 02:58 PM

These factors are partially summed up in these statements from the highly respected IEA report; I am quoting from the MSNBC report:

Quote:

On Monday, Energy Information Administration Administrator Guy Caruso predicted gas prices will rise another 20 cents a gallon by December to catch up with oil, according to Dow Jones Newswires.

But those high prices appear to be cutting demand, the IEA said Tuesday. The IEA, an energy policy adviser to 26 predominantly Western industrialized nations, cut its fourth-quarter oil demand forecasts by 500,000 barrels a day, and cut its demand forecasts for 2008 by 300,000 barrels a day. Year-over-year demand growth will now average 1.2 percent in 2007 and 2.3 percent in 2008, the IEA said.

At the same time, global oil supplies grew by 1.4 million barrels a day in October due to increases in OPEC supplies and production in China, Azerbaijan and Russia, the IEA said. The Organization of Petroleum Exporting Countries boosted output by 410,000 barrels a day in October, the IEA said.

“There are ... strong indications that high prices are depressing demand,” the IEA said in its monthly Oil Market Report

However, there are still factors keeping the price from falling sharply. The worldwide economic boom will help keep the price high.

Tim · 11-13-2007, 03:01 PM

The drop today was sharp:

Nymex Crude Future is down to $91.04, a drop of $$3.58.

London Brent Crude is down below $90 at $89.13, a drop of $3.21

Oregon Elephant · 11-13-2007, 03:05 PM

That's true, I thought that it was interesting that the oil price is falling while the stock market, as awhole, was rising today (I haven't checked it in the last hour).

Perhaps it is just the typical winter slump for oil finally catching up, but that wouldn't explain the sudden drop of this amount. The more that the world can raise the oil production and lower oil use, the more the price will drop. So why doesn't the US drill for more oil? At the least it will make us far less dependent on other countries for that oil.

Tim · 11-13-2007, 03:18 PM

[quote]

Quote:

Originally Posted by Oregon Elephant

That's true, I thought that it was interesting that the oil price is falling while the stock market, as awhole, was rising today (I haven't checked it in the last hour).

Yes, the financial markets are having a very good day - and the drop in oil is a factor. Lower infation - lower interest rates - stronger growth.

Quote:

Perhaps it is just the typical winter slump for oil finally catching up, but that wouldn't explain the sudden drop of this amount.

True.

Quote:

The more that the world can raise the oil production and lower oil use, the more the price will drop. So why doesn't the US drill for more oil? At the least it will make us far less dependent on other countries for that oil.

The world is currently experiencing the greatest boom since the very end of the postwar boom in 1973.

Growth has been in the range of 4-5% for the last four years - and of course, the world now includes nations such as China, India, central and Eastern Europe and the smaller wealthy nations of eastern Asia. In the 1960s, these nations were either strangled by communism or still developing or held back by a socialist economic structure (India). The free market has triumphed - people are lifted out of pverty by the millions - but the use of energy is growing too.

I don't see a decrease in energy use in the next few years - but alternative energy is the wave of the future. Definitely.

Oregon Elephant · 11-13-2007, 03:40 PM

Quote:

Originally Posted by neorealist

speculator speculators speculators....they pushed the price up to an inflated level. The price dictated by S&D should be at around 65USD.

But that wasn't done intentionly. Speculators make predictions based on what they think will happen in the world. All the fear of a war with Iran causes them to fear higher prices on oil later, so that drives the price up now. The same goes with the current Gold boom, that is being driven almost purely by speculation (investors buying every once of media time they can get to say that gold is doing so well, and buy my program to show you how to buy gold) and soon gold will fall down off of the speculation bump that it is on.