If anyone has been watching daily fluctuations in oil prices they’ve had an exciting week. On Tuesday, prices suffered a $5.33 fall, the largest since the start of the gulf war, but on Thursday it rose by $5.60, the second highest dollar gain on record.
That spike had the FT predicting ‘An assault on $150 level’ but did anyone expect today’s $6.72 drop? Oil is currently at 138.46 and may rise by the close of today but such a steep drop defies conventional logic.
Last week’s Freddie Mac and Fannie May crisis caused a rush away from the dollar, leading to its lowest recorded rate against the euro ($1.6038 ) and a 1.2% fall against the Swiss Franc. As expected, investors swamped the commodities lifeboat and gold rose to $987.75. They also, logically, rushed oil, causing the large gains mentioned. But right now, gold is down to 971.6 and oil dropping as much as $9.26 according to CNNMoney.
The drop could be caused by the weak American economy leading to a drop in demand. President Bush’s speech today gloomily mentioned drilling offshore and the mortgage crisis, and Ben Bernanke said “The mortgage crisis and high energy costs will remain a drag on the U.S. economy for the rest of the year”.
But American demand seems to count for little more than shock value anymore, supplies are increasingly being enveloped by oil hungry economies like China and India. OPEC’s hesitance in increasing supply could lead many to believe that the market is already oversupplied and a drop in American demand could cause a massive correction in the price of oil. Which is a logical argument, but not the one valid today.
Oil Energy Money predicts this week’s price roller coaster will be just as turbulent as investors rush in to buy what they consider cheap oil. This will in turn lead to huge gains, which will probably lead to sharp falls. So keep an eye on volatility, and hold on to your hats.
