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Oil May Drop $30! Do
Supply and Demand Work?
by Troy Patton, CPA - Finance Geek
(written in June 08)
Shocking claims
right?
When I tell folks I
think the dollar will rally, rates will rise, oil will drop $25 to $30 and the
market will go higher 15% to 20%, I get the “deer in the headlights stare.” Let
me explain why this may become reality.
For many months,
analysts have been predicting oil prices would fall because supply and demand
would dictate the fashion of consumption. The government is now coming out
saying speculators are driving prices higher.
I would agree that the
speculators have driven prices higher and the same limitations and margin
requirement should be on commodities and oil as well. However, forget the blame
game that now even the government is using which is dictating higher oil prices.
Let’s take a look at
June 19, 2008. Why is this day important in the price of oil? This day and the
months that follow will bring lower oil prices. DO NOT get me wrong, I do think
the long-term trend in oil is higher. However, it is difficult for anything to
go straight up continuously.
On June
19, the Chinese government increased gas prices by 18%. The citizens of China
have only been paying $2.40 a gallon as those of us here have been paying over
$4.00 a gallon.
How can
this be? China dictates the prices and have been eating the cost of oil. It is
getting harder for them as well as India to do this any longer and are starting
to pass along the costs to their people.
Here in
the US, consumption is dropping and it will start to drop there as well. Did you
think supply and demand were real? Hardly. Now we know why supply and demand in
oil was not working correctly.
Corrections start small and this could be the start of a sign of weakness in oil
which will translate into a 15% to 20% drop in oil. This drop should give
consumer confidence a lift and then will put some returns into the markets. In
addition, the Fed talking up the dollar will not hurt either.
We
need old fashioned supply and demand!
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