Oil: Is The Price On A Downward Trend?


If you're worried about losing your job, being able to afford your mortgage or paying your heating bill, you're likely to ease up on the money you spend on energy--whether its filling up the gas tank less often or putting on more sweaters in your house.

Concerns about the economy and weakening energy demand certainly caused oil prices to slide this week. But whether you believe we're headed for a recession or that the slowing economy here in the U.S. will be offset by tight oil supplies and increasing consumption from China and India, the fact is momentum is mounting as oil prices head south.

A floor trader bought the single contract at $100/barrel to start off 2008. Since then oil prices have fallen over 10 percent and volume has increased significantly.

On January 3, oil prices surged to an all-time high of $100.09 in electronic trading, but the overall volume in crude oil futures traded at the New York Mercantile Exchange in the pit and electronically was only 423,000 contracts.

On Wednesday, overall volume for NYMEX WTI hit its highest level in over a month--topping 702,000 contracts. Meanwhile, prices had settled at $90.84, closed at $90.13 yesterday and could be poised to finish the week below the $90 mark.

We've seen a big drop in open interest this week as well. Energy analyst Peter Beutel of Cameron Hanover points out:

"Crude oil open interest fell by a daunting 46,301 contracts on Wednesday, and that strikes us as being a decisive retreat from long positions by trading funds. It looked like these funds were getting back in on the long side as early as the final days of 2007. ...That has changed this week. Some 47,546 contracts have been liquidated, so far, this week. "

It's not only about the flat price. Joe Terranova, director of trading for MBF Clearing Corp., tells me he's "more focused on shuffling the deck" and moving longs further out the crude curve to future month contracts. An approach many other traders are likely to adopt as we head into the 3-day weekend. February NYMEX WTI futures expire on Tuesday, and a flatter crude oil curve may be in our future.

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