Thanks for the comments. I agree with you. I even wrote the following in the post:

“The sharpness of the recent decline lends some credence to the belief that much of the 2008 price spike was related to speculative trading activity. After all, the move from the 120′s to the 140′s came with nearly no new information that would lead one to think the supply/demand balance had changed materially. Daily price swings of $5+ became commonplace without significant events accompanying them.”

The real question is, since we agree $148 was not based on fundamentals, what is the oil price going to be based solely on supply and demand? I believe the bullish backdrop is intact (demand growing faster than supply) so I think oil in the $100-$150 range is not unreasonable, whereas $50 oil is unlikely.

Of course, that can change if the world truly weens itself off of oil and adopts alternatives en masse, but i don’t see that happening, at least anytime soon anyway.

Your comment that the fundamentals of the oil bull market are still intact leaves out one very important factor. In any bull market, there needs to be a sense of greed that persuades everyone down to the shoeshine boy to buy in. I believe most of the rise in oil past $100 was due to hedge funds, speculators and everyone else jumping on the bandwagon. Once this fades (which is definitely happening) we return to normal price appreciation and perhaps underperformance because the allure is gone. (Witness the drop in real estate even though land is a dwindling commodity) Couple that with all the new drilling projects, alternative energies and general push to find more oil (because it’s sooo profitable at $150/bb) plus a slowing economy worldwide and you have a commodity market with serious headwinds.

The much longer term picture is probably still bullish but I would consider that to be years out.

Cheers,
Marc

Peak oil theorists think it will be difficult to produce more than 85-86 million barrels per day globally. Current projections are 86+ for 2008 and 87+ for 2009, so we’ll just have to see.

Here are the EIA numbers for 2005-2009 (produced/consumed):

2005- 84.59p, 83.65c (act)
2006- 84.55p, 84.70c (act)
2007- 84.48p, 85.53c (act)
2008- 86.39p, 86.31c (est)
2009- 87.58p, 87.30c (est)

You mention the demand growing at 1%, do you know if supply is projected to remain flat or decline?

I have been on this kick for a bit, but the normal price spread between oil and natural gas is around 8:1. My colleague here at Soleil, Paul Leming of Soleil/Princeton Tech Research, figures it actually has been 7.08:1 for at least the last dozen years. So one of the current prices is wrong. Oil at $116 and natural gas at $8.11 is a 14:1 ratio. Sooner or later, things revert to the mean, and I believe this case will be no different. Typically when you get out of whack to this degree, oil will come down in price and gas will go up.