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Oil prices are in retreat, and it could be the start of a return to saner energy prices. As recently as mid-January, light, sweet crude fetched $85 a barrel. Today, oil is in retreat, but still above $107 a barrel.
Here are three reasons oil will come back to $85-$90 a barrel, and one big reason that's a good thing.
Demand dropping/supply rising. The market is working. As unrest moved across the Middle East and North Africa (MENA), oil prices jumped. At the same time, Saudi Arabia, the main global “swing” producer, promised to increase production to cover lost crude out of Libya and elsewhere. Rising prices have curtailed demand, and today the Saudis said they were cutting back to their pre-crisis production levels, citing a lack of demand. In the U.S., crude oil stocks have steadily risen in the past few weeks. Tomorrow's weekly report is expected to show an increase in supply of 700,000 barrels, on top of the nearly 2 million barrel increase reported last week. Supply rising, demand dropping. That's a recipe for falling prices.
MENA issues fall to simmer from seethe. Still plenty of problems in the region, but seemingly fewer than two months ago. The Libyan situation remains foremost, but it seems to have entered a quieter phase. If Bahrain remains quiet and Egypt gets itself sorted out with too much additional difficulty, the “MENA-crisis premium” could come out of crude oil prices.
Japan earthquake cools global recovery, but doesn't kill it. Supply-chain disruptions and the extended nuclear emergency curb the global economic recovery, thereby keeping demand for crude from getting too hot. Goldilocks prevails – not too fast, not too slow.
Why a good thing. Today, falling oil prices are rattling investors who fear that this is a sign that the global recovery has come off the rails. As prices ease back toward January's $85-$90 a barrel, it will become clearer that the recovery is still intact – just as it was back at the beginning of the year. U.S. corporate earnings will help solidify that view. And with oil prices lower, gasoline prices will decline and investors will suddenly feel a bit richer. That should give consumer confidence a jolt and the recovery another leg of strength.
Lots could go wrong with these ideas, especially in MENA. But falling oil prices may not be as bad as some fear today.
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With the USD in an unabated free-fall and the U.S. taxpayers on the hook for trillions in debt growing by the day, there’s no end in sight but to continue flooding the markets with greenbacks.
Saner oil prices? That would take sanity in Washington, D.C. Something that hasn’t happened in over a century.
i will watch the MENA as well but my primary focus will be on the US dollar. Until we get our house in some kind of order i think our dollar will continue to fall, which will push oil higher becaue they (OPEC) and other oil exporters are dumping our dollar every chance they get and buying the Euro, CCF and anything else paying a higher yeild.
The wheels are coming off.
MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. The Wall Street Journal's Chief Markets Commentator Dave Kansas and MarketBeat lead writer Matt Phillips spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Dave at dave.kansas@wsj.com or Matt at matt.phillips@wsj.com.
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