Oil Falls Most in 3 Years ($7.38) as Worsening Economy Threatens Demand

[phantom power]

Crude oil for August delivery fell $7.38, or 5.1 percent, to $137.80 a barrel at 1:13 p.m. on the New York Mercantile Exchange. It was the biggest percentage drop since Dec. 27, 2004. Oil fell as much as $9.26 to $135.92 today. Futures reached a record $147.27 a barrel on July 11 and have risen 86 percent in the past year.

``When it traded below $140, a big wave of selling hit,'' said Addison Armstrong, director of market research at TFS Energy LLS in Stamford, Connecticut. ``The market was trading a little bit above $140, and when it traded below, it fell something like $2 in a minute. Nothing seemed to hold it. There seems to be a bit of a panic.''

U.S. gasoline demand has fallen for 11 consecutive weeks through July 4, amid record pump prices which topped $4 a gallon for a fourth consecutive week, according to MasterCard Inc.

http://www.bloomberg.com/apps/news?pid=20601072&refer=energy&sid=aWANBngiwF88

[TheCowsCameHome]

1. Yeah, and the pump price will drop .01, if it drops at all.

I wouldn't get too excited, folks. Better hold off ordering that Hummer.

[Hydra]

2. And it will be up to $150 next week

Volatile, to say the least.

[napoleon_in_rags]

14. I agree. I don't think its quite enough to bring about the long term changes yet.

When things start to change with how we live and alternatives, only then will it decline.

[Hydra]

15. pfff

Demand is NOT driving this price. You're safe to invest in oil because it's likely to get to $200 or more a barrel by the end of the year.

The problem is this: say you buy right now at $137- if it reaches $200, you are only making a 50% profit. Bushco did much better- they bought in at ~$35 and have made a 500%+ profit.

[napoleon_in_rags]

16. Pff yourself.

Demand drives all prices. The only reason they can get away with charging so much is because people NEED the stuff and demand it.

[Hydra]

18. Then why are they exporting at record rates while demand is dropping here?

You can cause a squeeze by limiting supply and limiting alternatives, which is what has happened. Artificial shortage.

The mystical market only works as advertised when there is true competition and equal access...which isn't the case.

[napoleon_in_rags]

19. There's a few of factors as I see it.

One is obviously increased global demand, which we probably both agree exists. The second often overlooked factor, is simply devaluation of the US dollar. A dollar buys a lot less oil than it used to, so foreign buying power has increased which is driving those exports (the fed pushing more money into the economy is going to make this worse) and the third is speculation, based on the fact that dollar is the big petrocurrency. Conservative speculation on the part of foreign investers (given the knowledge of peak oil) is translating into huge price increases for us because of our devaluing dollar, though not necessarily for them due to their strong currency.

So in summary, I think things are truly fucked up, and nobody is going to be able to walk right in and fix them quick by telling oil companies to cut that crap, including Prez Obama.

[Hydra]

20. Actually, Prez Obama could do A LOT

He could call for the end of subsidizing the oil companies and investigate them or impose a windfall tax until they quit screwing around.

If they are for profit entities, then they get to be regulated and taxed on their earnings. If they are a vital part of the infrastructure that requires gov't money to survive, then we nationalize them.

Right now, they are getting the best of all worlds, while having none of the drawbacks.

And lest we forget, Oil Company Execs met in the late 90s to try and find a way to deal with the low gas prices. Seems they found a solution.

[napoleon_in_rags]

21. All that would be good for sure, but I think any solution will take a lot of time

I'm just not sure how much they are screwing around. Record profits? Yes. But there is a sweet spot of maximum profit where everybody is still driving and paying, before they start driving less and pushing hard for alternatives. I think we're past that point, which tells me something bigger is going on than just gouging.

[happyslug]

27. No, the next big period for a price will be October

Remember for decades the high point for the price of Gasoline was Memorial day. then the price dropped all Summer. The price climbed again starting in October.

The reason for this is that the Refineries Switch production in the Spring and fall. In the Spring the refiners switch to producing more gasoline out of each barrel of oil do to the up coming Summer Driving Season. In the fall the refiners switch to produce more home heating oil for the upcoming winter. The big switch in the Spring for the switch has to occur at the time of the last cold snap, which can be in April, which gives the refiner only two months to Memorial day (April and May). In the fall the Switch starts around labor Day (The end of the summer Driving season) but people often wait till November to buy their Winter home heating oil, thus you have almost three months to make the Switch September, October and November). Thus the fall switch does NOT have to be as fast as the Spring Switch, thus the price of Gasoline goes up more in the Spring then in the fall.

Now the above assume a "Normal" Situation. We do NOT have that at the present time, but the reasons for the above still exists and still has some affects on Gasoline prices. The problem is that we apparently have a REAL shortage of oil, which is also pushing up the price of Gasoline. This has been the big push over the last several years. The interaction of these two reasons for the price of gasoline is what is going on now. The underlying shortage still exists and continues, but we are in the traditional Summer period when price should be decline. These two movements seems to be canceling each other out at the present time. A further factor is the high price of oil has cause people to use less oil, less demand for oil, less demand for a price increase.

All told we are in the Summer doldrums of oil prices. I expect the price to stay what it is for the normal rule of thumb is it takes four weeks for the price of oil at the well head to reach your local gas station, it takes eight weeks for a price DECREASE to reach your local station (This is the Economic concept to "Price Stickiness", known by economists for about 100 years). Thus the recent drop in prices have NOT been reflected in your local prices, and given that come September the annual push for price increase will be kicking in, more than canceling the present Summer oil price doldrums.

One last comment, Another factor is the Switch among Europeans ot Diesels over the last ten years (a switch coming to America). In the winter of 2006-2007 the price of Gasoline was low in the US, while Diesel and its cousin home heating oil went up. The reason for this is that while you can emphasis production of Gasoline or Home hearing oil (Diesel is the same as home heating oil, the main difference being the tax on Diesel) when you produce one or the other, you still get some of both. In the winter of 2006-2007, Europe suffered a severe cold snap, and used a lot of Home heating oil. This released a lot of gasoline that Europe, using more and more Diesels, had to ship to the US. Now, Europe could, and did, try to produce more Home heating oil then it normally gets from a Barrel of Oil, but gasoline was still produce and was a glut on the European market. That Gasoline was shipped to the US, and kept US gasoline prices down in the early part of 2007. Then as the summer driving season approached, gasoline prices rose and continue to raise even in the Fall 2007 period and continued till recently. This both reflected the lo price Gasoline was compared to home heating oil in the winter of 2006-2007 and a growing shortage of oil. Europe did not have a bad winter last winter 2007-2008, and the US winter came in late (i.e. in January and February NOT November and December). This forced US refiners to keep Home heating oil in production long after it was normal for them to switch to gasoline. This combination of mild winter in Europe and a late Winter in the US lead to the present prices.

Gasoline supplies seems to have caught up with demand (more to a drop in usage do to the high price then anything else). That will continue till this fall, when the demand for Home heating oil will come into play. What will be the price for Home Heating oil #2 and its duplicate Diesel #2? What will happen to it lighter cousin Kerosenes #1 and its duplicate cousin Jet Fuel (There are technical difference between these two, but there are more technical then real)? Kerosenes generally more expensive then Diesel for it is a lighter oil, but both can be and are used in the same Vehicles (Kerosenes is a better winter fuel, less likely to freeze up then diesel, through neither are in the same class as a winter fuel as Gasoline).

This occurred last year and here are the Comments made at that time on DU:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=266x2398

[On the Road]

3. Speculators Have Been Sitting on Eggs for Weeks

waiting for a sign of the top. Then emotion takes over.

From the commodities side, the fear is not peak oil but peak oil prices.

[hatrack]

4. Wow!! A whopping 5.1%!!!! It tumbled all the way down to $137.08!!!

:evilgrin: :hi:

[phantom power]

6. I suppose we might get an indication of the much-debated "speculation factor" ...

from this. Then again, we might read tea leaves too.

One interpretation I have of current events is that we've been seeing a first round of people being priced out of the market (truckers, fishermen, etc), which would cause a plateau at the new price point. Assuming that is happening, the next interesting question is whether oil supply begins to decline further. If that happens, another round of price increases will ensue, followed by another round of customers priced out of the market.

[Tandalayo_Scheisskopf]

11. Yes, but...

That is known, in market parlance, as a "Head and Shoulders signal". We had the downtick last Friday, then it went back up, now it has gone down again. Generally speaking, a head&shoulders means there is farther down to go.

Of course, markets have beaten signals.

[On the Road]

22. In a Classic Head and Shoullders

There should have been a clear neckline with three rallies, the middle being the highest. Technically, volume should decline over the three rallies as well. If the price breaks below the neckline after the third peak, it is supposed to decline an amount equal to the distance between the neckline and the middle peak.



However, if the oil market is reacting to news rather than technical, patterns can routinely get smashed. Daytraders have been tearing their hair out recently over the refusal of the stocks to obey any technical rules whatsoever.

[Nederland]

24. Good Lord

Charting prices is the stock market and commodity market equivalent of astrology. Fact is, past prices are never never never a predictor of future prices. Prices go up or down based upon market events, not past prices Period end of story.

[On the Road]

25. Prices Can Change Any Time Based on News

or external events. Otherwise, technicals give a better indication of future movement than fundamentals, at least in the short term. In fact, many news items such as earnings surprises are preceded by technical signals.

It is easy to find stocks with good fundamentals, even outstanding fundamentals. Much of the time, stocks with valuations that look too good to be true usually are. It is often a warning sign that there is information that you or I are not privy to that is keeping professionals away. Examples from the last several months include OSK, UNH, ZINC, and KNL.

Technicals have to be watched, but trading without them is like flying blind. Stocks that form a new 52-week high on significant volume generally rally at least 10%. When a stock breaks through major resistance, you never buy until it's established a bottom or you'll lose your shirt. Trending stocks tend to repeatedly return to a moving average for the duration of the trend -- for example, the green 13-day average in both up and down trends on this chart of GMGC.



Random movement does not have this characteristic, and significantly non-random movement is generally tradeable. The best point to buy or sell short is when a trend has been established and the stock is oversold based on the stochastic. If you think this not a typical chart, look at a few dozen -- you will be surprised.

Head and shoulders is one of the more complex patterns and is frequently misidentified. However, when a classic heads and shoulders completes and sinks below the neckline, it almost always continues down. The GMGC chart above actually meets the definition of a heads and shoulders formation, complete with declining volume (although it is an odd-looking one). If you were wise to technicals, you would have bought GMGC in about the second week of April when it was near 5,or at a couple of other points. If you still held it in July, you would have had a stop in place at about 11 (just below the red 50-day average) to keep from getting creamed when the stock crashed. That is how technicals can be employed, even while knowing very little about the company.

[Nederland]

26. Technical analysis is bunk

...and has been shown to be bunk by every academic paper researching the subject since the mid 1970's. The problem with charting is simple: for any given set of past data for any stock or commodity I can show you a set of examples where that stock or commodity went up, a set where it stayed flat, and a set where it went down. In others words, past behavior tells you nothing. That has been proven by exhaustive statistical analysis of decades of market data. I'd recommend reading "A Random Walk Down Wall Street"--a classic that is now 35 years old and still holds up.

[On the Road]

29. Academic Studies are Not as Uniform as You Suggest

Cheol-Ho Park and Scott H. Irwin reviewed 95 modern studies on the profitability of technical analysis and said 56 of them find positive results, 20 obtain negative results, and 19 indicate mixed results. Cheol-Ho Park and Scott H. Irwin, What Do We Know about the Profitability of Technical Analysis.

Here are several individual studies:

1) Skabar, Cloete,
2) Osler, Karen (July 2000) ," Federal Reserve Board of NY Economic Policy Review
3) Andrew W. Lo (Lab Dir. MIT), Harry Mamaysky, Jiang Wang, NBER Working Paper No. 7613 (March 2000)
Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation

It does not surprise me that academic papers often do not find support for technical analysis. Because all players in the market have the same goal, simple strategies become obsolete fairly quickly. To write an academic paper, however, you need something clean cut and easy to define in the paper. I would not expect most of these strategies to work. A more practical method would be to take a group of experienced daytraders and see if they can outperform the market or a group of nontechnical traders. If it is a random walk, they should not be able to. And yet good traders routinely do.

It is one thing to criticize something like simple momentum-based strategies -- buying when a trend is established and selling when it ends. That may in fact not be a successful strategy. It is another to deny all technical indicators, when some are very clear. Resistance and support levels are nonrandom on their face and extremely useful in trading. Trading on sentiment indicators at the extremes (such as the put-call ratio or the VIX) is also routinely successful, as we have seen this past week.

"A Random Walk Down Wall Street" is a classic, but that does not make it the last word. "A Non-Random Walk Down Wall Street." identifies a number of identifiable non-random patterns.

Random walk hypothesis is generally based on the idea of efficient markets. This not only denies observable patterns like time of year and time of month effects, but ultimately denies human behavior and the whole field of behavioral finance. It neglects the fact that information is never objective, but is always interpreted through sentiment. Anyone able to maintain perspective through the internet valuations of the late 90s and the real estate valuations of the mid-00s knew at the time that they were behavior-driven and not rational. Today the same thing is evident with oil and commodity prices. They are sentiment-driven outliers and are not going to be sustained.

[notadmblnd]

5. Will big business ever learn.. when you price the little guy out of the market

there will cease to be a market? Or did they just think the middle class could keep pulling gold bricks (credit cards) out of their asses to pay for it?

[Speck Tater]

7. Ask any mathematician. Volatility is a sign of the impending onset of chaos. NT

[lldu]

8. All it takes is for some one to holler "TERRA, TERRA!"....

and it will leap again

[Javaman]

9. Yeah that's a regular fucking free fall alright...

:eyes:

I give till labor day when it will hit $150+.

[One_Life_To_Give]

10. Nah, It's Dubya(W) opening up offshore drilling!

That there Texan told them whats what. Said we gonna drill offshore and them there Ahy Rabs knew they was done for an are gonna let the prices come back down.

:sarcasm:

[JohnWxy]

12. I hope some Wall Street speculators are getting burned at least a little bit.

[JohnWxy]

13. here's some more from the article: "Gasoline demand fell 5.2% the 12th consecutive weekly decline."

U.S. gasoline demand fell 5.2 percent last week, the 12th consecutive weekly decline, a sign record pump prices are changing driving habits, a MasterCard Inc. report showed today. Gasoline futures fell 17.29 cents, or 4.9 percent, to $3.3848 a gallon in New York.

[skids]

17. Yep that's how to take it to them... use less.

Though in this case we are being a bit premature. I'm sure the usage was part of it but also I recall seeing something about various financial institutions having to dump some of their oil interests to cover their cash balance sheets in the wake of IndyMac.

[NNadir]

23. In fact, gasoline prices should never be allowed to go down.

I favor a law that any fall in gasoline prices be collected as a tax used to fund the emergency phase out of dangerous fossil fuels.

[JohnWxy]

28. Oil prices are tumbling for the third straight day (7/17) - AP

"and natural gas futures are accelerating a sell-off amid growing concerns about the weakening U.S. economy."

http://news.yahoo.com/s/ap/oil_prices

"Light, sweet crude for August delivery is down $3.50 at $131.10 a barrel on the New York Mercantile Exchange in extremely volatile trading. Oil is now down about $14 in the last three days"

This kind of volatility is typical when there is heavy involvement by speculators.