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Oil Still Has Worries: Slowdown In Demand

Tuesday, 22 Jan 2008 | 12:40 PM ET

It’s easy to see why oil prices saw a dramatic plunge to nearly $86 a barrel overnight as equities slumped around the globe.

A major player (the U.S.) was absent and that’s why traders here at the NYMEX say the reaction in the oil market, with the U.S. market closed yesterday for the Martin Luther King Jr. holiday, may have been overdone. Little liquidity results in big, exaggerated price swings.

A few traders have said the Fed’s emergency rate cut has helped ease some fears about the economy. Oil prices rose to $90 in the front month, before slipping. Other traders say it just underscores an immense problem that lies ahead. The elephant is still in the room, the primary catalyst remains: the potential for a severe slowdown in demand for oil.

MF Global analyst and CNBC contributor John Kilduff, a long-time bull, has turned “aggressively bearish,” as he says the reason for his bullish call has largely faded. “Crude was going up for good reason last year,” Kilduff says. “We had robust economic activity. Now we’re seeing the undoing in terms of high energy prices, consumers getting worn down.” Oil prices could head to $81 “fairly quickly,” he says

Speculators who also helped oil prices surge over 60 percent in 2007 may have stepped to the sidelines, but more expect additional unraveling. Tradition Energy analyst Addison Armstrong tells me he expects $20-$30 in “speculative premium” to unwind here and sees $75 oil “definitely in the realm of possibility.”

Dynamics in all markets have changed dramatically from 2007. This time last year oil was trading in the around $55. It was $40 higher 12 months later. Few expect the same kind of performance this year. It’s a traders market again and it’s going to take a lot more work to get a good return on investments this year, warns Joe Terranova, director of trading at MBF Clearing Corp. “It’s not a buy and hold market any more. You’ve got to pick your spots.”

Questions? Comments? energysource@cnbc.com