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Oil Investing: The last of the good oil days?

Posted February 5, 2008

"For all the talk of U.S. recession, and the fears that slowdown in America could spread to emerging markets, the price of oil hasn’t fallen that much. The current price of $89 a barrel is only two or three days’ trading away from the nominal all-time high." — Justice Litle

by Justice Litle

Baltimore – (TFN):  Whither crude oil? With so much going on, the black stuff hasn’t gotten much attention in a while.

The last big headline came in the first week of January, when crude futures touched $100 a barrel. Since then, the oil story has been dominated by economic slowdown and subprime. Crude futures have been stuck in a $15 range or so since mid-October.

On the bearish side of things, crude oil demand is headed into a seasonal low period. Refining rates have fallen to a 22-month low, as Americans tighten their belts and cut back on gasoline. There is also concern that Asian demand could drop if the global economy slows.

But there are bullish factors in place, too. OPEC is doing its best to keep a tight line, refusing to let the price of oil fall too hard or too fast. They learned their lesson in the late ’90s, when good-faith efforts to increase supply led to a price collapse.

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There’s also the currency issue. The U.S. dollar is showing short-term strength right now, but the inevitable long-run direction for the dollar is down. When the Gulf countries get shed of their inflationary dollar pegs — as they eventually must — that will put more pressure on the greenback. Since oil is priced in dollars, the long-term trend of dollar weakness drives the price of oil higher (along with plenty of other hard assets priced in dollars).

Then you have the ongoing global demand issue. For all the talk of U.S. recession, and the fears that slowdown in America could spread to emerging markets, the price of oil hasn’t fallen that much. The current price of $89 a barrel is only two or three days’ trading away from the nominal all-time high. Read on to learn if Shell is sounding the alarm for the last of the good oil days.

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