The Theory The Low Demand Will Moderate Oil Prices Dies

The theory that the recession would mitigate the price of oil had all the trappings of being true. Consumption in the US, UK, EU, and Japan happen to be down substantially. Industrial production has been dropping at a near-record pace. Consumer spending, especially on gas, has dropped. Fewer people are driving and those who are driving drive fewer miles.

China may be recovering from a slow period in its economy, but that recovery appears to be moderate and certainly not powerful enough to drive up crude prices around the world.

The alternative theories about oil prices are based on the fact that reserves in large producing nations including Russia, Norway, and China dropped last year, at least based on data from BP (BP). When oil prices were below $40, a number of nations cut back exploration and production. Large refiners like Exxon Mobil (XOM) cut capacity. The supply side partially collapsed.

Kuwait’s oil minister recently warned that prices could move back up quickly. He is dismayed by that, ironically, because he believes that higher crude will mean a prolonged global recession. Almost no one would disagree with him.

The price of a barrel of oil drove above $71 today, the first time it has hit that level since the beginning of the year. There are concerns that US crude inventories are down. That is simply a guess on the part of traders and analysts, but oil price speculation runs on guesses which may be one of the reasons that crude trading is so volatile.

The psychology behind the buying and selling of oil futures has swung to the fear that crude will keep going higher and only suckers will miss out on that trend. Just a few months ago, no one could be sold on the idea that oil prices would rebound this year or next.

Buying has reached a panic stage, a greed for gain and a fear of loss. That kind of mentality could easily push oil back to $100.

Douglas A. McIntrye