Have oil prices seen their upper limit? That's the question traders and analysts are debating following a two-session, 7% drop for crude oil. West Texas Intermediate settled at $134.58 a barrel on the New York Mercantile Exchange on July 16, marking a decline of $10.65 per barrel over two days. Oil prices have tumbled nearly 10% since hitting a record trading high of $147.27 on July 11.
Analysts say the two-day sell-off reflects the market's recognition of reduced demand in the U.S., even if longer-term trends remain bullish. Oil traders, it seems, may have finally noticed the public's reaction to high energy prices. "For a while the market heightened all bullish news and discounted anything bearish," says Joel Fingerman, president of FundamentalAnalytics.com, a Chicago-based energy consulting firm. "But people are giving up their Humvees and pickup trucks, and the market is starting to care."
"Astonishing" drop in demand Analysts say that while oil traders have been betting on surging demand from developing countries such as India and China, reduced demand in the U.S. is now sending bearish signals the markets can't ignore. Moreover, Energy Dept. data released July 16 showed a 3 million barrel jump in U.S. crude inventories, to 296.9 million barrels; analysts had expected a decline. Moreover, U.S. demand for energy products has fallen 2% from the same period last summer, according to a four-week average federal regulators release weekly. "I think this is a precursor to a much bigger sell-off," says Peter Beutel, president of Cameron Hanover, an energy risk-management firm in New Canaan, Conn. "It's very possible we have seen the worst this [price surge] is going to do to us. The tide is starting to change."
Fingerman points to the 5% drop in U.S. gasoline demand from the same time a year ago as evidence of a "structural shift in the car economy." He points to the sharp sales declines for large vehicles at General Motors (GM) and Ford (F), as well as wider use of public transport.
Since the U.S. consumes a quarter of the world's gasoline on a daily basis, lower U.S. demand has a "huge ripple effect" on the market, and that is starting to be reflected in prices, says Fingerman, who considers $80 oil possible by year's end. "I think it's the beginning of the end," he says. "The fundamental data just keeps getting more and more bearish." Another oil contrarian, Lehman Brothers (LEH) energy economist Edward L. Morse, sees oil in the lower $90 range by 2009. "The drop in demand [BusinessWeek, 7/16/08] has been astonishing, particularly in the U.S.," Morse says.
The Drive for More Regulation Other analysts say that while oil investors have been benefiting from high prices, consumers will eventually see relief. "The function of the price mechanism is not to enrich speculators or make Goldman Sachs (GS) rich beyond imagination," Cameron Hanover's Beutel says. "The high price is supposed to hurt demand and encourage new supply.
