Are oil prices coinciding with lifted bans or demand worries?

Okay, I admit, that’s an incredibly awkwardly phrased post title (I’m making a habit of those), but I wanted to ask you all a question.  What I noticed some weeks ago was that, the moment Bush lifted the executive ban on offshore drilling, oil prices dropped.  My view was that the mere expectation of increased domestic oil supplies was enough to put in a spike in the never-ending escalation of oil prices.

Today, however, I’m assured by Reuters that oil prices dropped because the market is “worried”:

Oil falls to 12-week low on demand worries

Oil fell to its lowest level in nearly three months on Tuesday, extending a steep slide since mid-July on mounting evidence high prices and a souring economy were cutting into world energy demand.

The drop coincided with a firmer U.S. dollar, which may have reduced the appeal of commodities to some investors playing the strong negative correlation between the markets in recent months, analysts said.

There is no mention at all in the article about Bush’s actions.

I’ll always be the first to admit that I’m woefully ignorant about the ways of the market.  However, my understanding has always been that, whenever there are oil worries, oil prices go up.  This is the first time I’ve heard of worries driving prices down.  And another thing — considering that rising oil prices have been terribly damaging to world economies, why does this article make it sound as if dropping prices is a bad thing?

Can anyone explain this to me?

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  • Danny Lemieux

    It just means that speculators and producers are worried that high oil prices have succeeded in reduced use thereof, thereby cutting consumer and industrial demand for oil to the point where there is now an over-supply of oil, resulting in prices dropping.

    For consumers, it is good news, so no worries there. For speculators and oil producers (e.g., Saudi Arabia and Venezuela), it’s bad news, so they are worried, because their income will fall.

    So, according to the MSM, there’s always somebody whose worried about oil prices, whether oil prices go up or go down. Ergo they can always devise a negative-sounding headline….at least until a Democrat is elected President. Then, the reverse will apply (happy-happy headlines).

  • Ellie2

    I’m no expert either but Here goes: commodities, which includes oil — and grain and pork bellies — are traded on the “futures market.”

    Analogy: I have an offer from my propane gas supplier. I can “lock in” the summer price now for gas that will be delivered in the winter. Or, I can pay as I go. I have to guess/bet if the price be higher in the winter.

    “The speculators” make the same bet. If they think that prices will continue to go up, they buy. If they think we are nearing (or are over) the top, they sell. So, yes, they sell when they are “worried.” But that’s not “bad news” — that’s just the way the markets work.

  • http://ruminationsroom.wordpress.com Don Quixote

    Danny and Ellie have it exactly right. The market is worried about lower demand so is selling off. I’d like to pose an alternative theory, but, I suspect, an unpopular one. The oil market has been overheated for a long time now. It is long overdue for a correction. The decline is nothing more than speculators taking their profits. It’s not very exciting and doesn’t mean much, but, as Ellie put it, “that’s just the way the market works.”

    P.S. I don’t believe that the lifting of the ban had any effect whatsoever. We are so far from actually getting any oil as a result that it’s not even on the radar screen of the speculators.

  • Ellie2

    One small point. Prices are dropping because “speculators” think the *price” (not demand) is dropping.

    And I do think it is related to the various activities of the government because the futures markets are ***highly reactive*** to rumors. “Buy on the rumors, sell on the news.” Well, Bush and others made the news.

  • http://ruminationsroom.wordpress.com Don Quixote

    Oh, Ellie, I do think speculators pay some attention to immediate fundamentals. Lord knows they react to every hint of a rumor of a drop in supply. I can’t imagine they ignore changes in demand. As for Bush making news, how much you want to bet that there is no new drilling before he leaves office and it will be up to his successor, and the Congress then in place, to decide whether his lifting of the ban means anything at all? It’s not news if you can safely predict nothing will come of it.

  • Danny Lemieux

    Here’s a prediction for you, DQ:

    If Bush or McCain was to announce a national priority (i.e., crash program) to drill for oil, cutting through all the bureaucratic red tape to do so, the world price of oil would…crash, if only because it would crash the speculators’ bubble.

  • http://OgBlog.net Earl

    Danny, the problem is that Bush has already announced such a thing, in effect. But, he can’t make it happen because Congress has ALSO put a ban on any more drilling on most of the Outer Continental Shelf.

    But, did you notice what happened to the future price of oil earlier today when Harry Reid hinted that there would be a vote on allowing drilling in at least a part of the OCS?

    Down over $3.00 almost immediately, as I remember. Speculators are human – they’re as subject to panicky reactions as any of the rest of us.

    By the way, I bought gas Sunday p.m. for $3.71/gallon here in Ooltewah, TN. It’s all the way up to $3.74 again today, so I’m feeling kind of smug.

    Sorry, California!

  • http://ruminationsroom.wordpress.com Don Quixote

    Hi Danny,

    I doubt it would make much difference unless McCain announced it after he is elected. Right now there simply isn’t enough time for such an announcement to mean much.

  • David Foster

    Another factor: Much of the increase in oil demand in recent years has come from countries which subsidize fuel costs. For instance, I recently saw an item about a guy who operates a small freighter (I think it was in Indonesia) who has been getting diesel at $2.50/gallon. These countries are now cutting back on the subsidies, because they just can’t afford it anymore, and this is affecting their demand.

    Also: natural gas prices have fallen faster than oil prices, and are below their typical ratio to oil. This is probably in part because since NG is 98% US-produced, there isn’t any immediate geopolitical risk.
    However, I think there are lots of factors which are raising demand for NG, and in a few years we may have a shortage which hits very hard.

  • Danny Lemieux

    I agree, Earl.

    However, I think that McCain would score big making a commitment to a crash-drilling program. Perhaps he should get himself filmed against the background wasteland that is coastal ANWAR when making such an announcement. And it really is a wasteland.

    Another factor has to be the declining value of the $US. If the $US strengthens (as it will), oil prices will drop.

  • http://OgBlog.net Earl

    I agree back, Danny — I think McCain could win the election by visiting ANWR and coming back to announce that the evidence had driven him to change his mind.

    More talk about his economic plans and what they’ll do for the country, and less about Obama’s silliness. I loved the “celebrity” ad with Britney and all, but I don’t think that’s going to get him the Presidency. If he’d take Obama’s challenge and start talking about what HE would do and what would follow, as opposed to what OBAMA would do and what would follow, he’d win easily.

    This is not to be construed as betting advice or anything – what do I know?