Thursday, May 5, 2011

Oil prices drop 10% in one day, which isn't entirely good news

A few days ago, I described how oil prices dropped and stocks went up on news of bin Ladin's death. I also said that it wouldn't last, a view shared by Kunstler.
This morning, Bloomberg is putting out a story that the price of West Texas Intermediate crude oil dropped - from $113 to 112 - because Bin Laden was tossed into the sea. How long will that state of affairs last, I wonder. Through eleven o'clock in the morning, Eastern time?
He called it, at least in the short run, as West Texas Intermediate rebounded to its Friday levels by noon. However, that price drop now looks like a preview of coming attractions.

Reuters: Oil crashes 10 percent in record rout
By Matthew Robinson
NEW YORK | Thu May 5, 2011 5:40pm EDT
Oil collapsed into free-fall on Thursday, diving as much as 10 percent and sending U.S. crude back under $100 a barrel as investors staged a nearly unprecedented stampede for the exits.
This could be interpreted as good news, as it means that gasoline prices are likely to drop soon. However, it isn't entirely good news, as it is a sign that the market became worried that the price was getting high enough to impede expansion.
Weak economic data from Europe and the United States fed concerns that have battered commodities all week. German industrial orders fell unexpectedly in March while U.S. weekly jobless claims hit eight-month highs, sparking a fourth day of profit taking in early trade.
The oil markets have been doing this dance for a year now. Just about every time oil's share of U.S. GDP starts to pass 4%, Hamilton's magic number for contraction, the price drops. The traders are acting as if they know what that 4% share (or the 6.5% of personal income spent on energy) means and they sell off.
But the onslaught of selling went far beyond any single cause.
I've also heard and read that the projected end of the second round of quantitative easing has let the air out of commodities, although Krugman disputes that it's just the dollar.  He even points out that the recent price rise in Euros has been even higher in percentage terms than it has been in US Dollar terms with the following graph.

Speaking of Europe, Brent crude also followed suit.
Brent crude plunged more than $12 at one point -- exceeding the sell-off that followed Lehman Brothers' collapse.
That's even better news for lowering gas prices, as a lot of the gasoline in the U.S. is refined from oil priced as Brent, not WTI.

So, how long will this trend last?
"The longer-term bull cycle is still in place, but this correction may have a life span of several months, as weaker economic data is fueling this correction to a large part," said Sterling Smith, senior analyst for Country Hedging Inc in Minnesota.
Just long enough to the economy to expand some more, that's how long. If I were Obama, I'd hope oil prices and the U.S. economy keep doing their dance until November of 2012. Maybe they will.


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