CNBC: Plunge In Oil Prices Flushes Out Speculators

The plunge in oil prices has flushed out many of the speculative investors in crude, who have exacerbated the swings of the already volatile commodity in recent months.

With fewer speculators, oil prices are likely to settle out at a level that more closely mirrors the current supply-demand picture. Several analysts say oil could decline another several dollars per barrel lower before turning higher.

“Some of the run up in oil that we saw over the last four months had a lot to do with the speculators, and I think that what went up is now coming down,” said Peter Yastrow, a market strategist at Man Financial said on "Power Lunch." “We are shaking out the speculators.”

U.S. crude oil futures recently were seesawing between highs near $53 and fresh 19-month lows below $52 as traders take positions ahead of a long holiday weekend. Even at this comparatively lower level, prices still remain far above their historical averages. In 2004, oil fetched $41 a barrel, while in 2003, it cost about $30.

Oil is now down about 33% from its record finish of $77.03 on July 14. It also has fallen nearly 14% from the start of the year.

Meanwhile, J.P. Morgan said it was cutting its forecast for U.S. crude oil prices for the
first quarter of 2007 by $16 to $52 per barrel, Reuters reported.

"Although we are only revising our full year average down by about $3 to $61 per barrel, the revision is heavily concentrated in the first quarter--a period that we had expected to be the strongest of the year," according to a research note.

Magnified Pullback

According to Yastrow, world demand did not change so dramatically as to justify the size of the recent pullback.

Craig Russell, a chief market strategist at Ikon Global Markets, also expects a reduced level of speculative investing in the oil markets. He expects oil prices to stabilize at about their current level, “with perhaps $3 to $4 to the downside” from recent levels.

Russell doesn’t expect the “risk premium” that has been priced into the oil market to go away completely. That premium reflects current geopolitical factors, but he already sees less of a knee-jerk reaction in the oil market to certain world events.

Russell cited recent events in Venezuela and Russia as two examples of news that would have roiled oil markets just a few months ago.

Venezuela President Hugo Chavez, buoyed by a landslide re-election last month, is seeking the state takeover of utilities. This could have an impact on oil and gas projects there. Meanwhile, oil supplies in Europe were threatened by a dispute between Russia and Belarus over transit fees on oil exports. Neither of these events stemmed the recent losses in the oil market.

Benefits Dollar

The plunge in oil prices has been a benefit to the value of the U.S. dollar, which has been strong in recent trading sessions, according to Russell.

Earlier today, U.S. currency hit a fresh seven-week high against the euro and a 13-month peak versus the yen. The dollar has since retreated.

There are sure to be other beneficiaries as well.

“It looks like the tide of lower oil prices has lifted nearly all the boats,” said Alan Skrainka, a chief market strategist at Edward Jones. “Technology stocks have been strong, financial stocks, consumer discretionary, but I think the big winners in all this are certainly stocks tied to the consumer, especially at the lower end.”

U.S. drivers have been enjoying lower prices at the pump. The average U.S. retail price for a gallon of gasoline down from about $2.33 on Jan. 1 to about $2.27 now, according to data from AAA. If crude prices hold at current levels, experts estimate that pump prices could fall about 15 cents further.

“For the consumer, especially for the low-end consumer, it’s a windfall,” said Steve Goldman, a chief market strategist at Weedon & Co. He expects companies such as Wal-Mart that are heavily dependent on the low-end consumer to see improving profits as discretionary income climbs.

Helping Economy, Stocks

“Basically what it amounts to about a $500 million a day tax cut to the American economy,” said Fadel Gheit, an energy analyst at Oppenheimer. “So that’s huge. That’s why the stock market is hitting an all-time high. Not because anything changed, but because oil prices came down sharply.”

According to Gheit, $70 and $60 oil is more of an aberration than a reflection of the global supply and demand.

Beyond the U.S. consumer, many industries have been feeling the pinch of higher oil prices, including airlines and cruise lines. However, just how soon these sectors will benefit is dependent on whether oil prices are sustained at these levels. Also, many of these oil-dependent companies have already lock-in their costs by hedging oil prices months ago when levels were still high.

“I would look more closely at the chemical companies that use a lot of petroleum,” said Addison Armstrong, an analyst at TFS Energy. These companies also use a lot of natural gas, which also is trading at lower prices.