Saturday, November 22, 2008, 3:59AM ET - U.S. Markets Closed.

The Downside of Falling Oil Prices

Posted Jul 24, 2008 12:24pm EDT by Aaron Task in Investing, Commodities, Recession

Oil stabilized Thursday after a rapid 15% decline from its recent record high of $147 per barrel.

Some are attributing crude's fall to the work of speculators. The Wall Street Journal suggests the collapse of SemGroup, an oil marketing firm that got burned being short oil, as the reason for crude's decline. "SemGroup's rapid exit from the market removed a force for upward momentum" that its short-covering efforts had delivered, the story says.

Such factors can't be dismissed entirely and surely a lot of "hot money" has been swapped out of commodities and into financial stocks in the past week. But the "blame the speculators" crowd is, once again, missing the fundamental issues driving energy prices down of late, much as they had driven them higher previously:

  • U.S. demand for fuel has declined for three straight weeks, the Energy Department reported yesterday, as evinced by an unexpected rise in gasoline stockpiles and lower-than-expected refining capacity.
  • Hurricane Dolly didn't directly hit oil installations in the Gulf of Mexico.
  • Tensions with Iran have diminished in recent weeks (although certainly remain high.)

Perhaps most importantly, the dollar has risen as the global economy is starting to show the strain of rising inflation, as well as the financial markets crisis. This is particularly true of emerging economies but Thursday saw startlingly weak reports on U.S. existing home sales, Germany's key IFO survey and U.K. retail sales, while New Zealand's central bank cut rates for the first time in five years.

"Thursday's currency trading looks like a contest of which currency has the worst economic fundamentals," writes Ashraf Laidi, chief FX strategist at CMC Markets.

The takeaway from this being that recent optimism about the stock market (prior to Thursday's dip) was misplaced if it was based on the idea oil's decline is entirely a "good news" story.

45 Comments

you
wegemerrita - Thursday July 24, 2008 12:41PM EDT

The Oil tanker is sinking,everyone that jumped on board diserves what they get!

you
Bob T - Thursday July 24, 2008 12:49PM EDT

Keep your eye on the macro picture. world wide energy growth is the big picture. its growth rate may of slowed down for a brief time, but it is still growing. buy energy. hydrocarbons are the biggest component of energy, for the forseeable future, regardless of what the green media favors. good time to be long on energy. god bless.

you
Bob T - Thursday July 24, 2008 12:52PM EDT

Keep your eye on the macro picture. world wide energy growth is the big picture. its growth rate may of slowed down for a brief time, but it is still growing. buy energy. hydrocarbons are the biggest component of energy, for the forseeable future, regardless of what the green media favors. good time to be long on energy. god bless.

you
Yahoo! Finance User - Thursday July 24, 2008 12:55PM EDT

Jesus, talking heads, talking trash, etc. etc. etc. Someone said yesterday, actually oil's recent pullback is 3 things: weak dollar, weak demand, "weak" speculators, i.e. another "shortie" going belly up I guess it's kind of "who said, what said" again and all over. Fact is fiction and fiction is SPECULATION! Fundamentals are for quite some time "old hat", so is the weak dollar, what's new is...financials are trying to "lift" the market, good luck! Some other crack head said homebuilders are a steal right now, hehehe the onyl steal there is, is out tax dough going south!Bleah!

Yahoo! Finance User
Yahoo! Finance User - Thursday July 24, 2008 12:56PM EDT

I like aav and i'm going back in if it falls another dollar.

you
John P - Thursday July 24, 2008 12:57PM EDT

You just can't report any "good news". There is no down side to cheap oil. You people are idiots! NO NEWS IS GOOD NEWS!!!

you
carsnfrd - Thursday July 24, 2008 12:57PM EDT

WAAAAAA! speculators that come late to the party deserve to get basshed!

you
lrking1 - Thursday July 24, 2008 12:58PM EDT

more bs from wallstreet. crooks and thieves.

Johnny Ike
Johnny Ike - Thursday July 24, 2008 12:59PM EDT

Oil.......again....it is an old topic.......we suffer too much of it because of manipulation price fixing.......Why not tax them heavily.......let say 70% for destroying the whole nation and taking ordinary people money indirectly......Tax them....tax....them ........tax...them 70% straight away after the trasaction...let the pirates pay.

you
THOMAS M - Thursday July 24, 2008 01:04PM EDT

Why are we borrowing money from China to buy over priced oil from the Middleast ???

you
mods - Thursday July 24, 2008 01:11PM EDT

if anyone remembers, it was all about China's expansion that they said was the cause of supply problems. China has been rebuilding for the Olympics and their government has been paying the bill in order to show off on the world stage. After this summer they will no longer be floating the bill and will decrese their orders and go back to Tienemen Square highlights.

you
mpatrovsky - Thursday July 24, 2008 01:16PM EDT

Yeah, right, tax em. Who do you think "them" are? Idiotic idea. Any tax you impose on any product is not paid by the producer but by the consumer, that's you dummy.

you
mpatrovsky - Thursday July 24, 2008 01:17PM EDT

Yeah, right, tax em. Who do you think "them" are? Idiotic idea. Any tax you impose on any product is not paid by the producer but by the consumer, that's you dummy.

northstormmen
northstormmen - Thursday July 24, 2008 01:23PM EDT

OPEC just lowers production and Iran fires off missles so the oil traders for the Revolutionary Guards and friends of the Supreme Leader and the Prime Minister and other Oil Mafia types can make a buck!!!!

you
John P - Thursday July 24, 2008 01:23PM EDT

Drill for the short term, Nuclear for the long term. Wind power. What a joke! Let's see you pave the roads with wind. No UGLY props in New England for us, thank you. Conservation is the key. Solar and geothermal. Once they are installed, they can't charge you for it. There are tax incentives now, in the future they will want to tax you. Selling power back to the power companies. Now that's something everyone can enjoy!

you
Yahoo! Finance User - Thursday July 24, 2008 01:24PM EDT

Oil declining not a good thing? Yeah right. Another wall street idiot. Half of our current problem has been caused by high oil prices! Look at how many businesses have completely shut their doors, or have reduced their services and employees by more than half! So, the economy was already doing terrible because of the housing and credit crisis and then oil comes along and pushes more people into the unemployment line and closes more businesses down which in turn cause more people to go into foreclosure on their homes and further make the housing and credit crisis worse. Anyone who says declining oil prices is a bad thing needs to be taken out back and shot in the head. Yahoo should also screen these idiots before letting them talk to see exactly how big of a short position in oil these hypers have.

now_you_get_the_horns
now_you_get_the_horns - Thursday July 24, 2008 01:29PM EDT

I also would've preferred to hear Free Bird.

Yahoo! Finance User
Yahoo! Finance User - Thursday July 24, 2008 01:30PM EDT

This kind of argument is so stupid. Inflation pressure is as big an enemy as recession to stock markets. Inflation expectation dropping will boost market as long as recession doesn't get much worse. Do we need a drop in oil price to tell us the economy is bad, when some people are already calling a total collapse of the whole economy system? If oil drop further, at least the most dreaded stagflation scenario can be avoided. Also, this kind of argument implicitly assumes that only reason oil dropping is due to cooling down of economy. What about speculation? What about huge amounts of investment money flowing into oil futures in the last two years? Unless you are naive enough to believe money flow has nothing to do with oil price change, the drop in energy prices may has no prediction about worsening of economy and actually can be good to economy.

you
Jeffrey Johnsen - Thursday July 24, 2008 01:33PM EDT

Hey guys why not reframe the whole way you think of the world economy and think about the fact that reducing our ridiculous rate of oil consumption is a good thing for all of us, even in the short term (barrel price has retreated), and that maybe we need to fundamentally change the way we value companies. Growth cannot be infinite on Earth, so why not rethink markets and what is really important as we melt the planet and inflict all other pain upon ourselves because financial models only value growth and entrenchment in bad practices linked to earnings numbers?

you
Yahoo! Finance User - Thursday July 24, 2008 01:34PM EDT

if the fuel price keep goin high,then people will aware that we cant always depend on this so called 'black oil',but...when the price suddenly fall tremendously,then ppl will just keep using it...dude,we need to find an alternative energy to replace it,something more reliable...and greener if possible...

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