If there one certainty in the markets, nothing is certain. Take the price of oil. It hit a $147 a barrel on July 11. Now it's trading at a $126 a barrel. Several factors have helped push the price down.
First is the weak U.S. economy - an inventory report last Wednesday showed a larger than expected rise in crude stocks. Also there was a sharp fall in U.S. natural gas prices which also undermined the rally in oil. Another factor is forecasters expect Hurricane Dolly to bypass fields in the Gulf of Mexico. A stronger dollar is also an important factor.
Consumer behavior is also playing a role. High oil prices have forced some consumers to rethink their driving habits. In short, when oil prices approached a $150 a barrel, consumers said enough is enough.
Now instead of talking about how high oil prices can go, the bears are talking about how quickly oil prices could fall.
For instance, High Frequency Economics, a respected economics firm out of the U.S. Wednesday wrote that oil prices could hit $95 by the end of the summer, and Lehman Brothers expects crude to average $90 a barrel in the first quarter of 2009. If they are right that would be good for consumers, the economy, and inflation.
We know what happens if oil hits $200 a barrel, we also know what happens when oil falls sharply. Last week it fell more than 11 percent and that along with some better than expected earnings helped the broader market rally 1.7 percent, having fallen to its lowest level since November 2005 on that Tuesday.
If oil prices continue to fall that would further help market psychology, but it wouldn't mean the end of the bear market - there are still a lot of problems in the financial sector and economy, and those will take considerably longer to unwind. I still think the long-term fundamentals favor oil prices remaining firm.
I'm not alone - T. Boone Pickens, the legendary oil man, has predicted this week that prices will hit $300 a barrel in 10 years unless the United States reduces its dependence on foreign oil.
What do you think? Do you think that the fall in oil prices is temporary? Do you think the reason oil prices have fallen sharply is because consumers aren't willing to pay higher pump prices, or is it other factors?
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