CYCLES DON'T BOTTOM AT TWICE THEIR NORMAL FLOOR:

The End of Oil's Boom?: A 10% correction over the past week could signal the end of a long bull run for crude oil (Moira Herbst, 7/16/08, Business Week)

Analysts say the two-day sell-off reflects the market's recognition of reduced demand in the U.S., even if longer-term trends remain bullish. Oil traders, it seems, may have finally noticed the public's reaction to high energy prices. "For a while the market heightened all bullish news and discounted anything bearish," says Joel Fingerman, president of FundamentalAnalytics.com, a Chicago-based energy consulting firm. "But people are giving up their Humvees and pickup trucks, and the market is starting to care."

Analysts say that while oil traders have been betting on surging demand from developing countries such as India and China, reduced demand in the U.S. is now sending bearish signals the markets can't ignore. Moreover, Energy Dept. data released July 16 showed a 3 million barrel jump in U.S. crude inventories, to 296.9 million barrels; analysts had expected a decline. Moreover, U.S. demand for energy products has fallen 2% from the same period last summer, according to a four-week average federal regulators release weekly. "I think this is a precursor to a much bigger sell-off," says Peter Beutel, president of Cameron Hanover, an energy risk-management firm in New Canaan, Conn. "It's very possible we have seen the worst this [price surge] is going to do to us. The tide is starting to change."

Fingerman points to the 5% drop in U.S. gasoline demand from the same time a year ago as evidence of a "structural shift in the car economy."

Betting on Oil's Return to Earth: Lehman's lonely oil contrarian, Ed Morse, says the price bubble will burst before you hear Auld Lang Syne (Steve LeVine, 7/16/08, Business Week)

Edward L. Morse, Lehman Brothers' (LEH) chief energy economist, says the oil bubble (he dubs it Oil Dot-com) will burst by New Year's. Not only that, he predicts a plunge to about $93 a barrel. Pretty audacious as prognostications go, at a time when Goldman Sachs (GS) foresees $200 a barrel. To that Morse just replies that he's the one talking sense. "We are trying to keep our heads in a wild market," he says.

Morse is the most prominent oil contrarian on Wall Street. Before joining Lehman two years ago, he taught international monetary policy at Princeton University, was Deputy Assistant Secretary of State for international energy policy in the Carter Administration, co-founded consultants PFC Energy, and was publisher of Petroleum Intelligence Weekly. "He likes to be a provocateur," says Frank Verrastro, director of energy at the Center for Strategic & International Studies in Washington, who served with Morse under Carter. Morse has made bold predictions that Russian oil would weaken Saudi Arabia's predominance (bad call) and that scarce production capacity would drive prices up (bingo).

The 66-year-old Morse gives several reasons for being bearish. First, oil has long been cyclical. Why should the pendulum stop now? Second, Morse thinks China's go-for-broke industrial economy is slowing, leading to a "radical" reduction in its oil demand after the summer. Third, he foresees a big buildup in oil inventories this fall and, longer term, a greater flow of crude as new deepwater drilling rigs reach equipment-starved producers in the Gulf of Mexico. Finally, 13 million barrels a day of new refinery capacity will be available by 2013, making hard-to-process crudes more marketable.

The world isn't governed rationally, but suppose that this afternoon Democrats--who supposedly care about emissions--offered W and the GOP tax rate cuts in exchange for carbon consumption taxes. We'd be able to maintain an artificially high price of gasoline with catastrophic effects on the many vile regimes that are currently getting rich off of oil. We'd force innovation in the energy field. And we'd reduce the burden on something we want--people increasing their income--while raising the burden on that which we don't--consumption--thereby making possible and increasing personal savings.

Posted by Orrin Judd at July 17, 2008 8:16 AM