Gigem77

Crude Oil, Gold Prices Plummet: Time to Get Cautious About Dollar Bears

You correctly indentify the effects of speculation. But then you extrapolate the extent of this correction much too far. We've seen 4 weeks of a sharp correction in crude after a nearly straight shot 2 year run to the upside. For some perspective, the low in '07 was 51 on the continous contract and this year it was 85. So is this move from 147 to 115 really a " bursting bubble"? It looks more like a typical bull market correction to me. There have been several of this magnitude in the past 6 years.

From August through early October is the seasonally strongest period for crude prices. Corrections in a bull market are sharp , but short. Demand dampening in the OECD has been more than matched by demand growth in the ROW (rest of the world). The EIA reports for the past 4 weeks show increasing US demand for gasoline week over week. As soon as prices backed off a bit, demand responded quickly. So the fundamentals are quite strong for crude and gasoline.

Look at the timeline of events that coincide with the oil correction. The fed and treasury demonstrated that they would not allow a major bank or broker to go bankrupt. The SEC put 19 financials on a protected list. The CFTC threatened to change the rules for oil longs. Then came the big bail out of FRE and FNM. Those actions caused a host of funds that were long oil/gold etc and short financials to reverse their trades. This reversal had nothing to do with fundamentals. That's the major point that I'm making. We saw a radical change in how far the fed and treasury would go to manage the markets and that altered the perception of speculative fund managers.

Also, the banks that loan money to hedge funds were and are strained. So they called in loans, reduced lines of credit and forced hedge funds to reduce leverage. It was not possible for these speculative funds to remain long oil at 10-1 leverage and have enough cash to cover their financial shorts, so they sold. Profit taking, hedge funds imploding, de-leveraging, sector rotation and spec fund shorting are all short term factors. Actual physical demand for crude is still growing, production is flat and the big demand quarter is still ahead.

Finally, ask yourself what OPEC will do if oil does get into the 100-110 range. Do you really think that they will ever let it get below 100 again?