With fortitude, oil prices will correct

With fortitude, oil prices will correct
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First Published: Wed, Jan 23 2008. 11 43 PM IST
Updated: Wed, Jan 23 2008. 11 43 PM IST
Fears of recession have cooled the red-hot oil market—a bit. Crude futures prices are down as much as 14% from the $100 (Rs3,960) a barrel highs just three weeks ago. But there is still a lot of froth left in the price. Demand growth is slowing and supplies are increasing. If enough traders change their bullish tune, the oil price could plunge.
Just a few weeks ago, it was tough to find an oil trader betting against rising oil prices. That is changing. While the number of contracts traded on the oil futures market is still in record territory, a combination of recession fears and profit-taking has led some traders to back away from their long positions. Last week, the net long position for oil contracts held by non-industry traders on the New York Mercentile Exchange Inc. (Nymex) dropped 5%, according to data from the Commodity Futures Trading Commission. That suggests the proportion of financial players betting that oil prices will rise has declined. The shift, while apparently small, is contributing to the weakening oil price.
Nymex crude oil futures rebounded as high as $89 after the US Federal Reserve cut interest rates by 75 basis points on Tuesday. The record price was set at $100.09 a barrel on 3 January. This small step away from peak oil prices could turn into a stampede if recession fears continue to spook traders. Evidence that the oil price should be weaker has now become too strong to ignore. Latest demand forecast for crude of the Organization of the Petroleum Exporting Countries (Opec) is down, while worldwide supply is projected to grow. Oil inventories in the US are growing again because refiners are cutting the amount of crude they process as demand for petrol falls.
And economic weakness in the US could cause export-led economies such as China and India to cut back on manufacturing, reducing their energy usage.
Last week, refiners paid a weighted average $0.56 a barrel above Nymex futures prices for the West Texas Intermediate crude they bought on the spot market, according to Argus Media Ltd. The intractable bulls take that as a sign that futures are underpriced.
But there are signs that some members of the formerly bullish camp are finally recognizing that oil actually is overvalued.
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First Published: Wed, Jan 23 2008. 11 43 PM IST