Oil! a Leaking Bubble

The beauty of the market, whether it’s commodities, mutual funds, or just plain ‘ol stocks, is that they never fail to surprise me.  Only a month ago, I wrote an article about oil and why (based on analyst’s opinions) the price has increased so much, going up to $147 per barrel back in July.  Well, just four short weeks later, oil has come down to under $108 per barrel.  How in the world does oil spike up so quickly?  More importantly, how does it plummet so drastically?  Oil prices have decreased over 25% in the last four weeks, which makes me laugh when I think about all of those big shots from Goldman Sachs and such who predicted that oil will hit $200 by the end of summer. 

Of course, there are a number of reasons (based on analyst’s opinions) as to why the price of oil has decreased so much.  The economy of “powerful” countries, such as China, is weak and in jeopardy of a recession.  Demand for products has decreased due to these countries having weak economies.  Furthermore, specifically with China, the currency there has increased in value, which obviously makes exports less desirable, hence, causing a decrease in the output of goods.  Yet, the average person would conclude that if a county’s currency appreciates in value, why would it be having economical problems?  For that, stay tuned for another article…we’re talking about oil here. 

The demand for gasoline is weak, which makes oil less appealing to investors.  This further drives prices down, considering consumers of gasoline are finding other means of transportation, a phenomenon that is not all that phenomenal.  It was only a matter of time for people to start getting sick of paying over $4.50 at the pump for a gallon of gas.  Another reason why the price of oil has decreased is because of a stronger dollar in the last few weeks.  Our currency is on the rise (yippie!), and this is causing investors to pull out of commodities (such as oil).  Investors usually purchase commodities in order to hedge against inflation, and if the dollar is increasing in value, well, there isn’t as much hedging necessary.

There are many other factors involved, including hurricane Gustav not having the impact investors had anticipated for it to have.  Also, refineries are starting to slowly come back online after being shut down for various reasons.  So then, is it safe to say that the oil bubble has finally burst?  Or is it just leaking for now but getting ready to grow larger again?  Some analysts believe that prices can spike again due to unforeseen geopolitical events (could they be any more vague?) or OPEC deciding to cut back production (basically them saying,” We need to drive demand up, so we should decrease supply and drive prices up because this year I want to make $2 Billion instead of only $1 Billion”). 

Whatever the reason is for oil prices decreasing, I really don’t care.  As long as gas prices are decreasing, which they have gone down in the past month from a national average of $4.11 to $3.67 according to AAA, and then I’m a happy camper.  Might I add that just because prices have gone down about $0.45 doesn’t mean I’m satisfied?  It wasn’t too long ago that I could fill up the gas tank of a gas guzzling Camaro for no more than $35.00.  I’d like to see those times again, very soon, so I can drive more like Jeff Gordon rather than Ms. Daisy.