Slumping oil

It looks like Hurricane Gustav wasn’t the “storm of the century” (I think that one’s pretty much locked up), nor has it caused “rain of biblical proportions”. This is not to downplay the storm’s impact: it has done some significant damage, but relative to what was expected, I am relieved for the residents of the Gulf Region. From a commodities perspective, the hurricane has come and gone without doing much damage to Gulf energy production infrastructure. The result? Oil prices have tumbled about $10.

Last month, I wrote about why I thought oil prices would stay above $100 from here on out. However, some of what I’ve read in the past couple days suggests that Gustav could be a turning point for oil markets. Now that the largest natural disaster threat to prices has passed without causing much damage, the thinking goes, the price will continue to fall. I’ll note two things: the long term supply/demand fundamentals I talked about last month have not suddenly changed, and they still suggest a bullish price outlook on oil. Second, if oil continues to fall at this point, it suggests to me that the market thinks it’s still overpriced. I’m not sure that’s the case.

At this point, I stand by my assertion last month that absent a major change in supply/demand fundamentals, oil at less than $100/barrel is unlikely for any extended period of time. You’ll recall that I also wrote about the volatility of modern oil markets: perhaps we’ll see a dip, followed by the price rising back up.

Let’s all keep watching: like most everybody, I’m an oil consumer and not a producer or trader, so I’d be quite happy if my predictions prove to be wrong.