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Wall Street Journal

Oil Prices Ready to Sink?
Some Big Names Think So
By GUY CHAZAN and NEIL KING JR.
June 4, 2008

Is there an oil bubble that is about to burst?

Some big voices on Wall Street think so, predicting the oil market could tilt sharply south soon if the U.S. dollar strengthens and demand for crude oil weakens in some key consuming countries. Tightness on the supply side could also ease, they say, as some big refineries and new oil fields come onstream over the next few months and the outlook for the Chinese economy clouds over.

But don't count on a price plunge just yet. While oil has eased off its record of just over $133 nearly two weeks ago, there are still strong reasons to believe that the benchmark U.S. crude could hover at about $120 a barrel well past summer.

At issue are deep disagreements over what is driving the run-up in oil prices.

In the search for scapegoats, many on Capitol Hill in the U.S. and elsewhere are now blaming oil-futures speculators, noting the vast cash inflows into commodity index funds. But those skeptical of a sharp price fall point to a raft of continued gloomy news on the fundamental supply-and-demand side, arguing that an already tight market isn't likely to loosen for months.

The bearish argument has grown increasingly loud over the past week. Lehman Brothers on Friday compared the rally to the one-upmanship of the dot-com boom: Wall Street analysts have repeatedly raised their price forecasts as oil prices have soared, driving new investor flows that have pushed prices to still-higher levels, leading to still-higher price forecasts. Lehman sees the "classic ingredients of an asset bubble," with financial investors driven by a "herd" instinct and chasing past performance.

Hedge-fund manager George Soros also has chimed in. "We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble," he said Tuesday in prepared testimony before the U.S. Senate. Mr. Soros cautioned, though, that a crash in oil markets was "not imminent."

Economists who have cited the dollar's fall as a key factor in the rising price of oil now argue that that linkage is set to reverse. With the dollar now showing signs of strength, and the fears of inflation ebbing, oil prices also should fall, they say. Federal Reserve Chairman Ben Bernanke's comment Tuesday that further interest-rate cuts are unlikely gave the dollar another upward jolt.

To back its dot-com analogy, Lehman Brothers cites evidence that institutional investors, including sovereign-wealth funds, have been increasing their exposure to commodities. The investment house calculates that from January 2006 to mid-April 2008, more than $90 billion of incremental investor flows was devoted to assets under management by commodity indexes. It said for every $100 million in new inflows, the price of West Texas Intermediate, the U.S. benchmark, increased by 1.6%.

Yet others dispute the view that the run-up in crude oil is investor-driven. "This is the price you get if supply doesn't expand for five years and demand continues to grow as it has done for the last four to five years," says Paul Horsnell, an analyst with Barclays Capital in London. Prices will "continue testing upward" unless the supply-and-demand picture changes substantially, he says.

Others have also disputed the evidence that investors are driving up the price of crude.

In written testimony to the U.S. Senate last month, Jeffrey Harris, chief economist of the Commodity Futures Trading Commission, said that while futures-contract prices for WTI have more than doubled during the past 14 months, managed-money positions, as a fraction of the overall market, have changed very little.

"Speculative position changes have not amplified crude-oil futures price changes," he wrote. "More specifically, the recent crude-oil price increases have occurred with no significant change in net speculative positions." He also said there was no evidence that position changes by speculators "precede price changes" for crude-oil-futures contracts.

Mr. Horsnell and others contend that after their precipitous rise to $133, oil prices are now seeking a new equilibrium. Even the normally bearish U.S. Energy Department doesn't see prices falling far anytime soon. Guy Caruso, head of the department's Energy Information Administration, cited continued tight global supplies Monday when he predicted that oil will stay above $100 a barrel through 2009.

The main factor cited for sustained high prices is the surprisingly steep fall so far this year in production from some of the world's key exporters, particularly Mexico, Russia and Venezuela. The big producers within the Organization of Petroleum Exporting Countries have largely held their output steady since late last year.

Despite declining demand in the U.S., the thirst for petroleum products -- above all diesel -- continues apace in much of the developing world.

Rocked by the recent earthquake, China is now scrounging for all available sources of diesel to power thousands of generators that have taken the place of downed power plants. Surging domestic demand among Persian Gulf countries also continues to nibble away at available oil exports.

"What will turn this around is a real change in what has pushed this up in the first place, which would be a notable shift on the supply-demand front," said Mr. Horsnell. "So far, we aren't seeing that."

Lehman is in the camp that expects the supply-demand balance to change in the coming months. New Saudi oil production should come onstream soon, as well as big new refineries that will ease bottlenecks and bring greater competition in oil-products markets. Russia is enacting tax breaks that many hope will lift stagnant oil production.

Meanwhile, oil-demand growth is expected to ease in fuel-hungry China, as the economic slowdown in its Western export markets takes hold. China also has been stockpiling fuel in the run-up to the Olympics, and with the Games over, imports might slow.

All this could "set the stage for a significant correction" in the oil price, says Michael Waldron, an analyst with Lehman. Yet even he predicts that may not happen before the end of the year.

__________________
On order: 2008 2500 SLT 4WD Regular Cab 6.7l. Cummins.Auto trans, Flame Red, 3.73


In the UAE: (where foreigners can't buy trucks)
2003 Chev. Lumina SS (middle east version of Pont. GTO) 5.7 liter GenIII V8 (Corvette engine)
340HP, 325ft/lbs torque. SOLD, driving Hertz Toyata Yaris, (hey it's pretty fun car to drive in A. D.)

chadder1313

Man i sure do hope so. I know we all can use some help here.

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2006 2500 QC SB TRX4 G56
Smarty S06 TNT
Edge Juice w/ Attitude
SBC 3600
aFe Magnum Force Stage 2
aFe Blade Runner
4' Straight Exhaust
Leveling kit
35-12.50-18 Toyo Open Country M/Ts
Line X

Clayten

Crude will drop in price, but will the price at the pump do the same?

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94 Dodge SLT 2500, 4x4, 5 speed,dual friction clutch, 100 plate,AFC and plate full forward, A pillar boost and Pyro gauges, 4" exhaust, K&N FIPK with outer wear, Pac brake, Frantz Oil cleaner, Firestone air bags, Rancho 9000 shocks, GM rear brake cylinders, rhino lining, home made DSS and a bunch of stuff that I can't remember

P.J

Ah Ha!

Never do FALL as fast as they rise do they? Think we'll see it go DOWN 4 cents a day like it was going UP there for a while?

Doubt it.

usmc2311

I have noticed that a few stations around the SoCal area are going down. The local Mobil here in Anza usually is the most expensive around. Drove by there last Thursday and it was 5.09. Drove by the next day and it was 4.99. They adjust their prices based on what they pay upon delivery. So if it continues to drop, it will be weekly when they get their delivery. I've noticed a few stations in Escondido where the prices have started to come down. A small ray of hope.

__________________
2004.5 QC LWB 4X4 HO CTD SLT
Stock options:
Infinity Sound System w/6 Disc Changer
Trailer Tow Mirrors
Tow Package
Security Group

Additions:
AFE Pro Guard 7 Filter Kit
B&W Turnover Ball Gooseneck Hitch
Tekonsha Prodigy Brake Controller
Magnaflow Muffler with Dual Outs and 5" Tips
Rhino Lining Spray in Liner
more coming...

busta

price went from $4.65 to $4.59 here at one place

GalenEdgewood

It's down to $5.00/gallon on post right now. Spiked at $5.15 but backed down again.

__________________
2007 Dodge Ram 2500 SLT QC LWB 5.9L Cummins 4x4 6 spd Manual w/ Lonestar Quad Cab Group Mineral Grey - Stock
BakFlip Tonneau Cover
'Bout 24k on him at the moment

Bsplyr500

It was at around $4.98-9 and the next day I found it down at $4.69. Yesterday I saw $4.57. This is on the southwest side of Indianapolis.

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1996 2500 4x4 auto now an nv4500, Intake, 4" straight pipe, 4k GSK, 100 plate, tst light afc spring kit, 370's, CoolerTubz intake horn, Isspro boost and egt, and train horns for the shock factor.... looking to go into the 500-550 horse range

GhettoVaquero

plunge? from 130 down to what? 90?80?.......i would be thrilled to get diesel back down to under $3

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2006 CTD 4x4-->2" leveling kit, 18x9 pro comp 7089s, Xterrain 35s, debadged, silverline 5' tip, weathertechs, AEM Workhorse, MBRP muffler & cat permanent test pipe, nfab steps, recon tail lights

stinkindiesel

Cardlock down the street went from $5.21 yesterday to $5.17 now. They're still the sucker bet in the area, though- Valero down the block is at $4.99.

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CADTR #24 member number 5.9!!
'93 Dodge Club Cab CTD with auto.

"I thoroughly disapprove of duels. If a man should challenge me, I would take him kindly and forgivingly by the hand and lead him to a quiet place and kill him." -Mark Twain

"If pigs could vote, the man with the slop bucket would be elected swineherd every time, no matter how much slaughtering he did on the side." -- Orson Scott Card -Congrats, liberal America; you elected the kings of swineherds!

mcoleman

4.49 to 4.53 in the Ozark Missouri area for #2.

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1999 Quad Cab 4X4, AFE Magnum Force, TST Comp, Edge EZ, Sledpuller 66, Mach 4s, Billet equipped Floor It tranny, 5 inch exhaust, Air Dog fuel system, Snow water/meth, nitrous

1999 VW New Beetle TDI, with many mods to come.

No hour of life is wasted that is spent in the saddle. ~Winston Churchill

SolarExpress

Someone once said that economists have as much to do with the economy as meteoroligist do with meteors. We'll see.

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BLESSED WITH
'05 Solar Yellow Ram 2500 SLT QC SB CTD 6spd 3.73 LSD LoneStar w/Sport Package. No Mods. ARE Bedcover, Nerfs, Mopar Bedliner. (Current Status: Garage Ornament)
'07 Chrysler Aspen Limited (wifes new ride) 5.7 HEMI pig (powerful pig though)
'01 Intrepid ES (wifes old ride now my daily ride)
'71 Plymouth Roudrunner 383/727
'05 Kubota BX1500 FEL 54" MMM

Roperteacher

I have noticed that the VALERO stations are goiing down the most! Wonder why

__________________
2007 2500 INFERNO Red 6 speed Big horn 4x2. PML rear diff cover. Amsoil ATF4 in the trans. Ride Rite Air bags, GDP 2 micron Big line kit . Autometer Egt, Boost, and Fuel pressure. Valair DD HD clutch
2002 2500 4x4 Maroon
1996 2500 12V Laramie

usmc2311

The Mobile here in Anza went to 4.69 day before yesterday. Found out last night from a friend that they made a mistake and were raising it up today again. Stopped by there last night on my way home from work and topped off. Today they raised it up to 4.89. Still less than the 5.09 it was last week. LA AM radio station reported that Calif refineries were having to import gasoline because of an increase in diesel production. Maybe they'll get more out there and help get diesel prices back around mid-grade prices.

P.J

If this "bubble" is about to "burst" no one told the commodity traders, considering it hit ANOTHER record on Friday @139 a barrel.
Morgan Stanley predicts $150 by Independence Day.
http://www.msnbc.msn.com/id/12400801/

Market taking an almost 400 point dump?....ah....good times, good times.