Wednesday, September 17, 2008

Why Even Cheaper Oil Is Grim News

According to Businessweek - the sharp drop in crude prices is further fallout from the Wall Street crisis and evidence of economic weakness;
Any other day, Wall Street would have cheered a 5.4% drop in oil prices. That decline for crude futures, however, was accompanied by a nearly 5% tumble for the Standard & Poor's 500 index on Sept. 15. Stocks—as was made painfully clear to investors—are no longer trading inversely with oil prices.

Analysts say that investors, who had been pouring funds into commodities as an alternative to creaky stock markets, are now pulling out of the market. The withdrawal reflects a fear that the economic picture will remain bleak, causing reduced demand in both developed and developing countries. The price of a barrel of West Texas Intermediate crude oil slid $5.47, to settle at $95.71 on the New York Mercantile Exchange (CME). It was the first settlement below $100 per barrel in six months. "A weak economy and financial turmoil mean lower demand; that means lower [oil] prices," says Craig Pirrong, professor of finance and energy markets at the Bauer College of Business at the University of Houston.
If lower oil prices are here to stay, will consumers return to old patterns of consuming more petroleum products? Many analysts think not. "The demand destruction is irreversible," says Schork. "It's a situation of once bitten, twice shy. Prices may be down for now, but consumers know they could eventually move high again."