by Keith Fitz-Gerald 10/01/08
I've been predicting record oil prices for years now, so when crude recently plunged from its record highs, I warned investors and consumers that the drop was a temporary phenomenon.
But now it's clear that the fallout from the $700 billion banking bailout pact strongly suggests that my prediction will come true.
As the curtain closed on the third quarter yesterday (Tuesday) - leaving many investors worried that the long-feared "Super Crash" was imminent -- crude-oil futures were staring at their first decline in seven quarters and their biggest quarterly decline in 17 years, thanks to worries that a slowing economy would curtail global demand. By the end of trading yesterday, crude oil for November delivery had dropped $39.36 a barrel -- or 28% -- during the third quarter to close at $100.64 yesterday afternoon.
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It's been a volatile market, too. Oil traded within a $56 range during the quarter, reaching a record $147.27 a barrel on July 11 and retreating to as low as $90.51 a barrel on Sept. 16, Bloomberg News reported. Oil futures moved 5% or more during one quarter of the trading days.
Analysts repeatedly said this decline was merely the beginning, and that with a global economy that had been severely singed by the U.S. credit crisis, oil prices had nowhere to go but down.
But I continued to make the opposite argument. And a week ago, the markets made my point for me.
On Sept. 22, crude oil futures for October delivery soared $16.37 a barrel, or 15.7%, to close at $120.92, after trading as high as $130 a barrel -- thanks to a steep decline in the U.S. dollar and to speculation that the Bush administration's plan to bail out the financial sector might actually jump-start the U.S. economy, fueling inflation in the process.
The gain surpassed the previous record single-day-price gain of $10.75 a barrel, a move that occurred on June 6. [The biggest-ever percentage gain in a single day -- 20.9% -- was recorded on Jan. 3, 1994, according to FactSet Research Systems Inc.]
This record one-day surge a week ago caught many by surprise and jump-started speculation about whether oil prices will rise or fall from here.
Any disciples of doubting Thomas must only look at the reaction to the different phases of the bailout negotiations this week to see that the market has spoken again. Crude oil for November delivery dropped $10.52 a barrel, or 9.8%, to close at $96.37 on Monday after the House of Representatives rejected a Bush administration bailout plan. But that was a knee-jerk reaction to a worry that the lack of a bailout pact might spawn a recession.
Yesterday, however, crude oil futures rebounded $4.27 a barrel, or 4.4%, after analysts realized, upon reflection, that the U.S. economy -- together with the global demand for oil -- wasn't about to just disappear. And that wasn't even an actual bailout proposal in place. When a pact is signed -- as most analysts figure it will be -- crude prices will likely rebound even more.
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In the extreme short term, oil's probably going to bounce around the psychologically important $100-a-barrel mark -- if not a little higher -- as the U.S. government works to sort out the financial crisis.
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The reason is that any "recovery," or bailout, is intended to strengthen the flagging U.S. dollar. And a rising dollar tends to push crude prices lower because crude is traded mostly in U.S. dollars around the world.
So, as much as most of the world looks to Organization of the Petroleum Exporting Countries (OPEC) to determine the price of oil, the more important influencers in the near term actually are U.S. Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. -- the Batman (Bernanke) and the Boy Wonder (Paulson) of Washington's bailout set.
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