A barrel at 80 dollars


With the fall in energy commodity prices despite Hurricane Gustav, traders announce the end of the speculative bubble.

In recent years, the energy commodity market combined with a very active hurricane season have meant only one thing for oil: steadily rising prices. However with the end of Hurricane Gustav, the beleaguered greenback’s rally overshadows the new hurricane season rumbling in the Atlantic, proving that the very choppy US economy is terrifying traders more these days than the turbulent climate. . 

The price per barrel of West Texas Intermediate benchmark crude for October delivery reached $6 on September 2, then settled at $109.71 on the New York Mercantile Exchange. This is the lowest rate since last April, representing a drop of $37.56 from the record high of $147.27 on July 11. While Gustav seems to have caused only a cursory glance at oil and gas activity in the Gulf of Mexico, Mother Nature’s influence seems to be fading within the trading and investing community. The poor economic situation in both the United States and the world, added to an increasingly strong dollar, are weighing heavily on oil prices. In fact, the decline in demand for oil, implicitly linked to the decline in US economic growth, literally overwhelms the weather and geopolitical concerns that usually drive oil prices. “If you can’t rally with a hurricane hanging in your face, add to that 2 million barrels of refinement capacity and 96% of your offshore supply at risk, it would be hard to know what could be pushing you gather” ironically Peter Beutel, renowned analyst of the American broker Cameron Hanover.


Oil prices have fallen so low, so quickly that this drop leads analysts to predict a bursting of the speculative bubble. Several of them do not foresee a level at 100 dollars but lower, around 70 or 80 dollars. “We are at the start of a descent to 80 dollars in the price of a barrel of crude oil by the end of the year, at the earliest in September,” announces Joël Fingerman, president of FundamentaAnalytics.com, an energy consulting company based in in Chicago. “Oil prices are falling because they are overvalued,” according to Oppenheimer analyst Fadel Gheit. “We will not be able to sustain an artificial price for very long. In the end, the fundamentals of the law of supply and demand will take over”.  

Oil market brokers as well as some analysts have blamed rising energy needs in emerging countries for driving up oil prices, only now the turmoil affecting the US economy is spreading to the whole world. “A few months ago, it was all about China’s needs,” notes Stephen Schork, energy consultant in Villanova, Pennsylvania and editor of the Schork Report., a daily energy newsletter. “Only, a good part of oil prices comes down to hype.” The sluggishness of the market, the strengthening of the dollar as well as the constant decline in demand are at the origin of the drop in oil prices. Since July 15, the dollar has regained 8.5% of its value against the euro. “The rise of the dollar is the best explanation for the drop in oil prices,” says Beutel. 


While oil company stock prices have been falling since Sept. 2, airline stocks are soaring on the prospect of cheaper oil. Northwest Airlines shares rose 13% to $11.07, United Airlines parent UAL rose 9.5% to $12.16 and American Airlines parent AMR rose. jump of 8.7% which is equivalent to a value of 11.23 dollars. In 2008, airline stocks experienced an inverse curve to that of crude. Despite the fall in crude oil prices, the market remains very unstable. This is why some analysts believe that the market will once again yield to the law of supply and demand. Earlier this year, several investment banks predicted significant spikes in crude oil prices,

Arjun Murti, energy strategy consultant at Goldmann Sachs was one of them. He predicted a barrel of crude at $200 in the coming months. Indeed, crude prices could recover provided the dollar weakens again or as producing countries reduce production to keep prices high. An OPEC meeting is scheduled for September 9 in Vienna and the main players have made it clear that they will defend a barrel at 100 dollars.  


However, large weather uncertainties remain. On Tuesday, Tropical Storm Hanna was forecast for Georgia and South Carolina over the weekend and could be upgraded to a hurricane. Tropical Storm Ike also formed Monday in the Atlantic Ocean and could develop into a hurricane as it approaches the Bahamas. Meanwhile Tropical Storm Josephine has formed further east in the Atlantic Ocean and could strengthen and become a hurricane as it moves west, according to the US National Hurricane Center. .

Verdict? the only certainty that remains in the oil market is instability. “I don’t know how high oil prices will go,” Gheit said. “Ask Goldmann Sachs”

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