NYMEX Oil Trader Predicts Lower Prices for Remainder of 2009

Oil traders on the NYMEX floor. (image: npr.org)

Many prognosticators expect the price of oil to rise over the rest of the year. This makes sense, as demand for crude will most likely rise if and when the economy picks back up.

However, NYMEX trader Ray Carbone sees it differently. On Wednesday, when interviewed on CNBC, Carbone said that he expects that oil prices could drop to as low as $60 a barrel. Currently, a barrel of crude oil is trading at slightly more than $69.  Carbone attributes this to stabilization in three markets that can affect the price of oil – the stock market, the currency exchanges and crude trading. Carbone cites the fact that that the price of crude has been hovering between $67 and $73, and the dollar-to-Euro ratio has remained between $1.37 and $1.43 for a while.

“Nothing’s really changed in a long time,” Carbone said in his CNBC interview.

However, while Carbone said that a pullback in the price of crude could occur, he also thinks there will be extreme volatility in the market. And he also said that he is going to keep a close eye on the oil markets’ “fund flows.”

According to Investopedia, “fund flow” is a term used to describe the amount of cash that flows in and out of an asset such as oil. A heavy amount of fund flows would indicate that a lot of speculators are entering and exiting the oil exchange. And that, he said, could outweigh the basic market fundamentals of supply and demand.

One example of speculation comes in the form of an ETF, or exchange traded fund. ETF’s work much like index funds; they’re tracked to the movement of a particular market. The U.S. Oil Fund ETF tracks the price of oil. However, according to the Wall Street Journal, the U.S. Oil Fund has expanded from being a $7 million ETF to $3.8 billion in just three years. It now doesn’t just track the price of oil; through its sheer size, it has the ability to manipulate it.

Federal regulators are looking at ways to clamp down on speculation. One possibility legislators are looking at would be to place limits on the amount of oil contracts that large investment banks like Goldman Sachs could trade on a daily basis. The CFTC, which has oversight over the oil exchange, is looking at ways to have greater regulatory authority over ETFs.

However, Carbone said that this could be detrimental to the marketplace. Particularly, it could hurt “hedgers,” a term used to describe traders who actually consume oil.

“When you start to limit who could trade what, then you limit the possibility for real hedgers. Who are they going to trade with? Where is the liquidity going to come from? This could lead to more volatility,” Carbone said.

Watch Michael Carbone’s full interview on CNBC: