Oil Down

Oil dropped to $77.70 a bbl Friday. Interesting that we are in a financial panic and yet prices for commodities are going down. It has to do with the fact that expectations of reduced demand exceed panic buying caused by the failure of so many financial institutions. Another point is that the financial institutions are selling everything to raise capital.

The price of oil tumbled more than 10 percent Friday to its lowest level in more than a year, as traders feared that the global economic crisis will kill demand for crude.

Oil sold on the New York Mercantile Exchange dropped $8.89 to close at $77.70 per barrel, its lowest price since Sept. 10, 2007. Caught in the sell-off decimating all financial markets, oil plunged $16.18, or 17 percent, for the week.

"At this point, it's just everybody trying to liquidate everything," said Peter Beutel, president of the Cameron Hanover energy risk management firm.

So how about the Saudis? What are their plans?

The Organization of the Petroleum Exporting Countries has called a special meeting in November to deal with the plunge, and the group will probably cut production to shore up prices. Michael Lynch, president of the Strategic Energy & Economic Research consulting firm, said some OPEC members have signaled they want oil to stabilize around $80 per barrel. But if the economy worsens, they may not get their wish.

"I would be surprised if we go under $60," Lynch said. "But one question is, if you're the Saudis, and the price goes down to $60, do you try to push it up?"

A special meeting in November? That is approximately 15 trading days away. A lot can happen between now and then.

This decline in price should last a while for a number of reasons. One of the big ones is that in a down market some OPEC members will cheat and pump more that their allotment in an effort to get the money they need to keep buying off their subject populations. It is kind of perverse but the rational thing for suppliers to do in a rapidly rising market is to cut output. In a declining market the incentives are just the opposite.

I think Iran will be much less of a problem for the next few years.