News of OPEC increasing production and decreased consumption of gasoline in US, experts believe, are the reasons for the cool down of crude price.

But the main reason for the drop in prices is due to reduction in speculative trading. As the picture becomes clear, there is no much scope for speculation.  On July 11th Crude touched all time high at  $147. In just 2 weeks it has fallen by $ 24.  September contracts at NYMEX closed at $123.  After June this is the first time prices have fallen by so much.

Analysts attribute the fall in prices to change in the demand -supply equation.  In July alone OPEQ increased production by 2,00,000 barrels a day. 40 % of the total crude production comes from 13 OPEC countries.  Heeding to the request of the consuming countries Saudi Arabia alone increased the supply by 2 lakh barrels a day.

There are news about reducing demand in Asian countries too.  With the Economic slow down that has started in American and other markets and reducing demand for all consumables and goods, oil market has woken up to the reality.

If you observe closely the reasons for increase in the price, you will see that there is no rationality behind it.

1. Has the demand suddenly increased after January all over the world?

No.  Definitely it has not increased to such an extent as to cause turmoil in the market.  It would have been a gradual increase which has been happening over years.

2. Has the supply decreased?

Definite no.  There was no reduction in the supply by oil producing countries.

Fundamentals of demand-supply do not change every second.  It’s the speculative trading, increased fear of something going wrong and rumors that has led to the volatile prices. Otherwise there is no rationale or logic behind price rising and falling by  5 $ in the same day.

Then what drove the prices up?

a) Speculation

As equity and bond markets started falling down, more and more pension funds, hedge funds and speculators started putting money in oil contracts.  They speculated a lot and changed the direction of oil prices.

b) Mob psychology:

Out of 100 if 70 people say that the prices will go up, rest of the 30 will also be influenced by this, and the mob psychology will fuel the increase.  You don’t have to do anything.  By the time people realize this truth; clever speculators would have already made money.

c) America-Iran relationship

Traders and OPEC countries expected that the relations between America and Iran might deteriorate and this might affect oil supply further.

Why are the prices coming down now ?

i) Market got back it’s sense and realized the truth. OPEC knows that the demand will come down if the prices increase due to speculation and people will start looking at alternative sources of energy.  If there is a 10% drop of gasoline for one day all over the world oil companies would choke on their stockpiles.

ii) To curb speculative trading OPEC  raised production a bit and actually prices in US and Japan the 1st and 2nd largest importers of oil, prices have started coming down.

iii) US president has proposed to lift ban on off shore drilling.

iv) Fed chairman has said that it’s going to take time for the country’s economy to pick up and they are considering raising the interest rates. This has increased the fear of bulls in oil market and they are slowly with drawing.

Hope sanity gets restored and oil prices come down to $ 90 by December and gives courage to buy 4 wheeler for people like me

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