Farrell: Lower Oil Despite Storms and Russia

Updated post ...

A few months ago Sean Tully of Fortune Magazine was on Kudlow and Company and offered the thought that crude oil would go to $50-$70 a barrel before too long as that level represents the marginal cost of production and commodity prices often revert to the marginal cost. (Click here to see video)

Peter Beutel of Cameron Hanover was on CNBC a few moments ago and guessed oil would trade in a range of $68-$80 soon. Such directional estimates looked absurd recently as oil defied gravity and soared ever higher. Goldman Sachs recently forecast that oil would still see $149 this year. Anything can happen but the trend in oil, and most commodities, is clearly down in my view.

The recent strength in the dollar is probably caused as much by weakness in the Eurozone as anything else, but it is still strong. Since oil is priced in dollars, a stronger dollar can allow producers of oil to take a lower nominal price and not feel forced to cut production. OPEC meets again soon and with the threat of a resurgent Russia causing great concern in that section of the world, it probably is politically unfeasible for them to consider a production cut. Since they are overproducing the announced quota right now, chances are they will simply revert to quota and otherwise take a low profile. But the market knows this as well and the price of oil still can't move up.


It's 11 AM on Labor Day and it looks like the worst fears surrounding Hurrricane Gustav will not be met. Keeping in mind that it was round 2 of Katrina that caused the disaster, it does appear that Gustav is no danger to the oil/gas/refinery complex in the Gulf Coast.

We don't want to appear insensitive to the human suffering the storm is causing, but our job is to comment on the financial and economic effects of these things. There has been an unrelenting string of news items that should have pushed the price of oil much higher. Russia's incursion into Georgia and the threat a resurgent Russia holds for oil and gas exports from Central Asia coupled with the threat of a major storm didn't move the needle on the oil price. At this moment oil is off over $4 and is fast approaching the two hundred day moving average. That is usually a line of support but I would think it will be a thin, leaky Maginot line of defense and the price is going lower.

The action in the dollar and gold seems to confirm that view. The dollar is strengthening again today and gold is off $13. If this storm can pass, then we will quickly revert to worrying about what Steve Liesman earlier today (see video) called our original Category Five storm, the housing debacle.

Watch Farrell and other experts discuss the storm's impact in the video.