Oil Drop: Boon Or Bad?

The plunging price of oil has investors baffled… and worried.

Just like in late July, they can’t understand how crude prices have come so far so fast. But this time it’s on the downside.

“This whole trade is unwinding before your every eyes,” explains Dylan Ratigan. Oil slipped again on Wednesday trading down to $56 a barrel after as the government slashed its global demand growth forecast again due to the slumping global economy.

Demand in the United States, the world's biggest consumer of oil, is now expected to fall by more than 1 million bpd for the first time since 1980.

The theory behind the sell off has given rise to two camps. Some feel the run to $145 over the summer was completely artificial and current levels are where oil has always belonged.

Others think oil is being driven by fundamentals and the current price action suggests the global recession is going to be quite severe.

Going Even Lower?

“It’s all gloom and doom in the oil market right now,” explains Addision Armstrong, director of research for Tradition Energy. He says it’s just one bearish data point after another.

If you’re hoping to trade the space Armstrong says be careful. “There’s nothing that’s going to stop crude from falling,” he says. Even OPEC jumping in to cut production, which they might do, probably won’t stop to slide.

“Oil could potentially go to $45 before the end of this year,” Armstrong adds.

He also cautions the traders that there could be a ripple for a long time to come. "Companies have hedged oil at $110 or $120 earlier in the year on the belief that oil was marching toward $200. As a result they are trapped in their hedges. That could spell trouble going forward."

Some Good News

However, there is an upside to low oil prices. Retail gasoline prices dipped for a 17th week since July 4, falling below $2 a gallon in a number of states and approaching $1.50 at some service stations. That could spark spending as the Holiday's approach.

Is there any trade in the space?

The one bright spot is heating oil, Armstrong adds. Inventories are very low. “It’s set up for just in time deliveries which means when the cold weather comes heating oil should go higher and natural gas should go along for the ride.”

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