Decreased production and low consumption mean that fuel prices are falling, says Katie Hope
The black stuff is finally on the slide. From the heady heights of July this year when oil hit $147 a barrel and analysts were predicting it could catapult to $200 a barrel, forecasters are now betting the next move will be a slide towards just half that level.
Up until now, for spread betters oil has been a one way bet. If you’d put a long position on oil in February of this year and gone away until July (obviously, not to be advised without a judicious use of stop-losses) you’d have been quids-in.
Now, for the first time in almost a year, a long position in oil is looking decidedly unwise. Rumour has it that George Soros, the very man who made £1bn by betting on the pound’s fall when it fell out of the Exchange Rate Mechanism, is short on oil.
Soros has continually blamed speculators for driving crude prices to their recent spectacular peaks and dismissed the rise as a bubble. Could the man famed for breaking the Bank of England be right?
End of The Rally
An increasing number of analysts believe so. Dave Evans, market analyst at fixed odds betting company Betonmarkets.com, says: “If you look at oil at its peak it didn’t need any excuse to rise, a whiff of a supply problem and it went up $10 in a day.
“Yet recently in spite of lots of reasons for the price to strengthen, such as the Georgia/Russia conflict and hurricane Gustav, the price has barely moved.
“This more than anything else is a sign that for now the rally is over.”
By the end of last week the oil price was hovering around $107 a barrel, a near eight per cent fall in a week, with speculators rushing out of the commodity and into the dollar which in a neat inverse dynamic has steadily climbed as oil has sunk. In fact, the US dollar has appreciated a hefty 10 per cent in the past month alone, strengthening against both sterling and the euro.
Of course, oil is denominated in dollars, and while the American currency has been weak, oil has been at the top of spread betters’ long-only list. Now that the greenback is losing strength, people are starting to think that oil is only heading in one direction, and that’s down.
It’s all to do with the vicious cycle theory. This says that each increase of one dollar in the price of a barrel of imported oil increases the size of the US trade deficit by the same amount. This puts more pressure on the value of the US currency, which leads to a weaker dollar.
The result of this is that OPEC countries raise the dollar-denominated price of a barrel of oil to make up for the dollar’s fall, and so on. With the dollar rising this cycle is now quickly moving into reverse.
Oil cartel OPEC meets tomorrow amid increasing expectations that it may opt to cut oil prices to prevent a build-up of surplus stocks that could deepen the slump in prices.
Iran has said the producer-group may need to cut oil supplies by as much as 1.5m barrels per day by early next year – that’s almost 5 per cent – in order to balance global markets.
US government inventory data last week also showed total demand for oil products, such as gasoline, over the past four weeks, fell 3.5 per cent from a year ago, continuing a trend of weak consumption, largely due to people cutting back during the economic downturn.
When even the Americans, one of the biggest gas-guzzling nations in the world, are ditching the 4×4 and drive through McDonalds, in favour of public transport and walking, then it’s a pretty good indicator that oil prices really have got too high.
So should spread betters put a short on oil, take a holiday, and wait for the money to roll in? “It’s never a one-way bet, but the medium-term trend appears quite pronounced and the risk is clearly skewed to the downside,” says Evans.
That’s as close to a “yes” as you are going to hear. With the caveat that you should of course put in the appropriate stop losses, it seems the only way for oil prices currently is down. The message to car-driving spread betters looking to get their own back on the petrol pumps is simple: your time has come.