Oil Fever Breaking?


I think it's WAY too early to say "oil fever is breaking" or call a top here for oil prices.

Yes, oil futures dropped sharply again today, gold has followed ,and the grains (corn, wheat, soybean futures) are also down. The dollar is only marginally higher, but we could still see more weakness in energy futures going into today's close and tomorrow ahead of August crude options.

Oil is trading in the lower end of the range that it was stuck in much of June ($131-$139) and the level of buyers and sellers circling around $130-$135 strike price in options is significant.

On the geopolitical front, U.S. involvement in talks this weekend over Iran's nuclear program could eventually take a great deal of the risk premium out of the market. Yet the State Department today maintained U.S. Undersecretary of State William Burns is just going to Geneva to "listen", not negotiate. The focus for this top-ranking diplomat may be "on making diplomacy work", but whole process could take awhile.

Bernanke has highlighted the stresses on the U.S. economy very well over the past two days. The outlook from GM may have done an even better job in spooking traders about the negative impact high prices are having on gasoline demand.

But there are still several reasons oil prices could keep rising. Worldwide distillate inventories remain tight and there are no real signs of easing demand. Plus on the supply side, U.S. refiners are woefully under-producing heating oil ahead of the winter. Northeast heating oil stocks (the biggest heating oil market in the world) are 50% below the five year average. That would result in higher oil prices and much higher heating fuel costs for consumers this winter.

That said, $131 remains a key level to watch. If oil prices settle below that level, the downdraft could intensify in the short-run.

Questions? Comments? energysource@cnbc.com