Oil cost over $147 just three months ago. Now it is under $70. How low can oil go? How low should you want oil to go?

It should go much lower but don’t be too quick to rejoice. If prices fall further, the vast oil sands of Canada would become uneconomical. The tens of billions of barrels of oil lying under the deep waters of Brazil and elsewhere would cost too much to produce.

Oil first went down on weakening demand in the U.S. Then when it became apparent that de-coupling was a load of crap and our economic problems had spread to Europe, oil went down even more. Those were the first two legs. We have one more major leg to go.

Oil should fall another $10-20 per barrel as the global slowdown infects the fastest growing countries in the world. Those are countries in the developing world – countries like China, India, Brazil and Argentina. They’ve just begun to grapple with much slower economic growth.

In response oil producers are cutting back production. When they met last week in Vienna in an emergency session, they decided to cut back crude output by 1.5 million barrels per day. But I doubt that OPEC can put a floor under the price of oil. They failed to do it in the 1990’s. Too many OPEC countries didn’t like the idea of seeing shrinking revenues go down even further from lower production.

Will it be different this time around? Venezuela is a big spender. So is Iran. And then you have non-OPEC countries like Russia that are desperate to put more cash in their coffers. How long can they play this game? A few months won’t be a problem. But the global economic crisis will last longer than a few months … at which point we’re sure to start seeing cracks in OPEC’s united front.

Ten dollars a barrel? Sounds good. But it would not only signify an ineffectual oil cartel. It would also mean that the world is in a long and deep recession. And it would be setting up the biggest oil shortage yet once economies start turning around.

Call me crazy but I like where the price of oil is right now. In this case lower isn’t better.

Source: The Next Great Oil Shortage Begins Now

“As the post-Memorial Day hangover lingers, and $4 per gallon gasoline becomes a national reality, expect more and more daily energy prognostications,” says William Patalon III in Money Morning.

“Goldman Sachs Group Inc. (GS) already is on record for $200-a-barrel oil. As you all know, our own Keith Fitz-Gerald has projected a crude-oil price of $225 a barrel. Do I hear $250? What about $5 a gallon gasoline by July 4th?

“Sometimes, these daily price gyrations take on lives of their own, but at the end of the day, the basic laws of supply and demand always work themselves out.”

There’s a new oil rush going on in Alberta, Canada, says Alex Green in InvestmentU: “Alberta’s oil sands are the largest known reserve of oil on earth containing between 1.7 and 2.5 trillion barrels.”

“For decades, these sands weren’t even considered part of the world’s oil reserves because the oil there wasn’t economically extractable at prevailing prices using then-current technology. But times have changed… And the new gold rush is on.

“Here’s the kicker: Exploration of Alberta’s oil sands is virtually risk-free. You can’t drill a dry hole here. There’s no drilling at all. It’s a mining operation – and the reserves are thoroughly outlined. So what you really need is a company with plenty of machinery, money and manpower to dig it up and process it as quickly as possible.”

Read on here to find out the one undisputed blue-chip play on Alberta’s oil sands.

• Reuters reports OPEC Secretary General, Abdullah al-Badri, as saying “Record-high crude prices have nothing to do with supply and demand but rather are caused by speculation…”
• The Market Oracle claims “there’s no (oil) shortage; it’s just gibberish.”
• And Global Research says, “as much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”

But I’m telling you now, they are all wrong. The real driver of the price of oil is supply and demand.

Today, I’d like to prove it to you once and for all.

Speculation, speculation, speculation

It’s the cause of all our ills, apparently.

German and US politicians have called for a ban on futures trading to curb this ‘evil practice’.

The US regulator — the Commodities Futures Trading Commission (CTFC) — has launched an investigation… well actually it’s launched a number of investigations. All of them are a waste of time.

The CFTC is trying to figure out how much of the oil price is down to speculation and how much is down to supply-and-demand dynamics… I wish them luck. They’ll need it.

Political pressure has forced the regulator to produce a report that might make them look stupid.

Why? Because…

Long-oil speculation is NOT rising – it’s actually FALLING

It’s almost as if they are trying to shut the stable door after the horse has run over the horizon. In fact, the horse might actually have died after living a long and fulfilling life by the time this report is produced.

Let me prove it…

Net long positions on WTI futures contracts fell 80% to 25,867 contracts on the New York Mercantile Exchange in the week ended 27 May. This compares with a record 127,491 on 31 July LAST YEAR.

You can see the graph of net long positions on futures contracts on the graph below. See the recent plunge in net longs? This actually makes the speculation argument look very, very wrong — and shows the CFTC is wasting its time.

As you can see large crude oil speculation futures have actually fallen…

Net long positions fell during May; investors took profits on positions as the oil price hit all-time highs. This was accelerated last week when futures exchanges started increasing margin requirements as a way of shaking out speculation.

Oil futures trade on ICE Futures (which used to be known as the International Petroleum Exchange) in London and on Nymex in New York. Because futures are leveraged trades, investors have to deposit margin with the clearing house. This is a refundable deposit to cover any sharp losses if the market moves against the trade.

Both these derivatives exchanges have upped margin requirements significantly over the last week — indeed the margin requirement on some contracts has actually been tripled. The aim is to reduce volatility and force out the more speculative players.

LCH.Clearnet (the UK clearing house) said it upped the margin call due to “a change in the nature of the volatility across the oil curves.”

These increases in margin calls last week were therefore partly responsible for the 4.3% fall in the price of the near-month WTI futures contract from its all-time closing high of $133.17 on Wednesday 21 May to $127.35 on Friday of last week.

You have to agree this is hardly spectacular.

Of course, the move would not take all speculative players out of the market; the big players with plenty of cash for margin will just pay up… but the sign is that the speculative element may not be as large as some people think.

The US CFTC is therefore in a quandary. It has to produce a politically-motivated report on oil speculation at a time when speculation is falling.Rather them than me… but at least the report will be a humorous read.

Regards

Garry White
Editor
Smart Commodities UK

P.S. Garry’s Smart Commodities UK resource advisory explores the very profitable world of natural resources and hard assets. He delves into what’s going on in each sector and reveals the exact stocks you should buy as this unprecedented commodities boom fires on.

Source: Why They Are All Wrong About Oil