Oil prices, which have plunged 26% in the past month and a half, could continue moving lower in the coming weeks, analysts believe.
Crude prices plunged after Hurricane Gustav turned out to be less destructive then expected, fueling the sentiment that the oil boom is over for now. Even though oil pared its losses in afternoon trading, some analysts are predicting that U.S. light, sweet crude couldl drop to $100 a barrel or even slightly lower.
"This thing just seems to be playing out the way it should. The underlying fundamentals remain bearish," says Darin Newsom, commodities analyst at DTN in Omaha, Neb. "We're in this liquidation phase which should take us down to this $96, $98 trend that we've been looking for."
Oil's drop indeed can be traced to a number of factors: Declining demand in the US and abroad; the unwinding of a speculative trade that sent crude to its $147 a barrel record in July; and the resurgent strength of the US dollar.
And of course there's Gustav.
Some feared the storm was the second coming of Katrina, the hurricane that decimated the oil-producing regions in the Gulf of Mexico in 2005. But while Gustav surely caused havoc in the region, the aftermath left the major energy operations relatively unscathed. And traders don't see any of the other storms gathering in the Atlantic as a threat right now.
"We could easily test $100 here," Chris Edmonds, of Fig Partners, said on CNBC. "The mindset has definitely changed. If this would have been six weeks ago we'd be at $150 oil and worried about everything that could have possibly gone wrong in the Gulf." See Video here.
How Long Can it Last?
While few are arguing against a near term of declining oil prices, there's sentiment that it could get just as easily reverse if another natural disaster rolls in or if demand should pick up again as prices fall. Oil tycoon T. Boone Pickens, for instance, said on CNBC that he thinks oil will not fall below $100.
Sean Brodrick, commodities analyst for Weiss Research, earlier predicted oil surging to $157 a barrel. While that hasn't panned out in the short term, Brodrick thinks there's still plenty of reason to believe that oil will climb in the months ahead.
"Short-term recession can drive down the price of oil. Longer term I think the economy's going to recover and I think prices will be higher," he says. As for other possible factors: "How about there's a conga line of hurricanes?"
Edmonds also is cautious about the state of the Gulf oil industry.
"We still have a lot of knowledge to gain before we can assess the real, true impact of the storm, but traders don't seem to care," he says. "It looks like it's $100 or bust and it looks like speculation is on the downside."
Also threatening the slide is the position that the Organization of Petroleum Exporting Countries will take. OPEC meets Sept. 9 the organization has indicated it will defend $100 a barrel oil by cutting production.
"They're already scared about the rapidness of this slide," John Kilduff, senior analyst at MF Global, said on CNBC. "They think the world economy can handle $100 if not higher and they're going to go for it."
Kilduff engages in a full panel discussion about oil prices in video at left.
But Newsom thinks the slide can last longer, based on his belief that the notion of demand destruction is overblown in that the demand wasn't there to support oil's surge in the first place.
"The trends are very comfortable with supply and demand," he says. "They're very comfortable with the market going down until it sparks increased commercial buying."
Oil Loses, Stocks Gain
The oil and stocks inverse trade has been interrupted only a few times since equities hit their March lows and energy began its rapid advance. The trend held true again Monday, with the major indexes each posting healthy gains amid crude's fall.
If oil continues to slide, it could help avert an autumn drop that some analysts had considered to be inevitable.
"I think it certainly removes one of the headwinds that the market has been going against for a while," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "Hundred-dollar oil is pretty important."
Sparks is skeptical as to whether the trend lasts, based on the possibility of more storm damage, but says if oil does keep moving lower its positive effects on stocks will be widespread.
"It's probably going to be a pretty broad-based rally as oil continues to fill. I don't know if there are any particular sectors that will benefit more than others," he says.
Some analysts believe financials could get a boost from oil's weakness, and Sparks has been advocating for several weeks that investors start dipping into commercial banks like PNC and Wells Fargo.
But he does not encourage a sector play, in fact advising a short play on the Financial Select Sector SPDR exchange-traded fund. Investors also can play the ProShares Ultra Short Financials as a direct way to short bank stocks. The ETF gains 2 percent for every 1 percent drop on the Dow Jones US Financials Index.