With Oil Prices Falling, Signs Point to Long-Term Decline

Oil traders are getting nervous as dismal demand and stricter market regulations loom. (image: bloomberg.com)

Will the recent downturn in oil prices last? Signs are pointing to yes, according to Liam Denning’s analysis that appeared in yesterday’s Wall Street Journal.

Last Tuesday, crude oil traded at slightly above $73 per barrel; on Wednesday, a barrel cost $60. In just nine days, the price of the world’s most important commodity fell by 16%.   Oil prices posted modest gains this morning to end a six-day stretch of losses, but a major recovery seems unlikely.  Earlier this year, many experts predicted that an economic rebound was just around the corner. That wave of optimism helped to pump up the price of oil. However, the past few weeks have soured the moods of commodities investors. Poor unemployment figures and a decline in consumer confidence indicate that the recession hasn’t quite yet reversed.

But there is other news that has contributed to the recent price slide. On Wednesday, U.S. energy officials announced another increase in distillate fuel inventories. Enough distillate fuel is stockpiled for 49 days worth of supply, compared to 29 days at this time last year. Demand for gasoline has also been down, which has also contributed to the plunge in price.

Distillate fuels are used to make home heating oil, jet fuel and diesel. An increase in supply says that trucks aren’t moving goods, planes aren’t taking off, and homeowners are turning down their thermostats. And unless the economy ramps up extremely quickly, or temperatures this winter are extraordinarily frigid, oil refineries are going to have a hard time shedding their inventories during the course of the year.

But while the economic data and oil inventory figures have pushed the price of oil downward, federal legislators may be largely responsible if this becomes a long-term trend. Earlier this week, the chairman of the Commodities Futures Trading Commission said that his agency would hold hearings to consider measures that would clamp down on oil speculation. The following morning, the Wall Street Journal published an editorial co-written by British Prime Minister Gordon Brown and French President Nicolas Sarkozy that called for regulation that would stabilize world oil prices.

Many oil speculators are on edge due to the loud noises coming from the world’s political capitals and may flee the market to avoid operating under tighter trading rules. If that happens, they may look at recent trends and decide to “short” their investments before leaving.  And if enough investors do that, the price of oil could fall even further.

As a business reporter for thestreet.com asked, “Is it time to start talking about $50 to $55 oil?”