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Is Oil's Price Drop For Real?

Veteran Trader Says Don't Bet On It

By Mark Huffman
ConsumerAffairs.com

January 17, 2007

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Oil prices have sunk like a stone since last summer. Prices now hover barely over $50 a barrel, with consumers patiently waiting for gas prices to drop below $2 a gallon again.

However, one trading veteran and commodities expert believes that current prices are driven down entirely by sentiment, and that higher oil costs are right around the corner.

"We're seeing the exact same phenomenon we encountered last summer," said Kevin Kerr, editor of Resource Trader Alert. At the height of oil's rise in the summer of 2006, Kerr believes that the price was driven way above actual value by the "fear premium" of another potentially devastating hurricane season.

"Now we are seeing the same irrationality on the downside," Kerr continued, "Everyone wants to see cheap oil, and momentarily adequate oil supplies and a warmer winter are giving speculators an excuse to sell."

"No actual change in production, supply, or distribution is fueling this sell-off," Kerr continued. In fact, the market seems to be ignoring any resistance against the current plunge in prices.

Venezuelan leader Hugo Chavez announced recently that he intends to completely nationalize oil production. Chavez's infamy and his government's instability would naturally lend to an increase in oil's value, but the market was almost completely unresponsive.

According to Kerr, the same statement back in July of 2006 "would have sent oil to $100 a barrel ... there isn't a doubt in my mind."

"The real outlook for oil is not good," Kerr predicted. "I've heard predictions of a late season cold-snap due to El Nino, geo-political tensions are as high as ever, and the Gulf Coast is still very vulnerable to hurricane damage," said Kerr. "A lack of viable alternatives will keep oil demand high and any sort of disaster could easily send the price up 30-40 percent."

Kerr believes the pendulum is about to swing back in the other direction. He says that will mean oil prices back over $60 a barrel, and prices at the pump closer to $3 than $2.

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