1-2-09 by dugan
Remember those crazy gyrations of crude oil prices last spring and summer? Price gyrations of more than 10% in a day for no economically rational reason, as crude oil marched to $145 a barrel (and gasoline was $4 and up a gallon)? The turn of the year brought the Mini-Me version of the same, at lower stakes. It’s a reminder that the new administration can’t dawdle on regulating energy markets.
Oil prices are down today, but on the last day of 2008, prices spiked up 14% in a speculative frenzy that would have mattered if the price of crude oil was still over $100 a barrel. This time, the spike halted at about $45 a barrel.
Why did this happen? The recession is deep worldwide and oil and gasoline consumption are still down, down, down. The "reasons," as cited by oil analyst Tom Kloza in the industry publication Oil Express (subscription barrier), are nearly the oil expert’s version of comedy:
There were four working theories about the rationale for today’s surprising
afternoon spike. All were flawed, if not downright spurious, but they were (in
no particular order):
***The trading community was shedding short positions and balancing books for
2008, and with many participants beginning a four day weekend, there was more
fear attached to being net short, rather than net long. Short sellers would be
inclined tobe particularly nervous with violence an ongoing problem in the
Mideast.
***Russia’s game of international "chicken" with the Ukraine had resulted in a
threat for the former to cut off natural gas suppliers to the latter, and that
could ultimately lead to a scramble for other alternative winter fuels,
including heating oil.
***Lyondell personnel had confirmed that they are contemplating a possible
bankruptcy filing — among other options — and that spooked traders into
believing that poor economics could lead to some U.S. refinery shutdowns early
in 2009. This theory ostensibly wouldn’t help crude oil, but most of the
activity was among paper traders who were moving with the flow, rather than
considering consequences.
***The strong midday rebound promoted technical buying tied to the belief that
the $33 bbl or so level witnessed when the January WTI contract expired might
be the bottom.
Even after the plunge in oil prices, what’s driving the market is speculation: "short sellers," "technical buying," herd mentality. It didn’t matter a lot this time around. But without the energy market regulations sought by reformers, economic recorvery will choke on another spiral in oil and fuel prices. And here’s the bonus: Market regulation doesn’t require a trillion-dollar buyout or stimulus package.