Oil price due for a fall but then another rapid rise

High oil prices in the face of a struggling global economy make no sense. Only speculation is keeping prices up. Take that away with renewed turmoil in global financial markets and the oil price will come tumbling down.

We last saw this in the summer of 2008 when oil peaked at an all-time high of $147 a barrel and then fell to $33 by December in the global financial crisis.

QE2 misunderstood

Those who think QE2 or money printing from the Fed will keep oil high miss the point. All the anticipation of QE2 is now in the already high oil price. If the reality of QE2 is disappointment and currency turmoil, and lower financial markets (click here), as seems to be the case then oil prices will come down.

The big question is whether oil prices will stay down once they have come down. That seems less likely. For one thing the Fed will return with QE3 and hurry up with the release of QE2 and speculators will need to pick on an asset class to drive up. Oil has served them well in the past.

For another thing the oil market supply situation remains relatively tight with Goldman Sachs last week warning of a much tighter market by 2012. The stories of Peak Oil and dwindling supplies are far from fairy tales.

However, this does not make Black Oil immune from renewed global financial chaos in markets. Speculators will liquidate oil positions to pay down debts from losses in other markets, and a selling momentum will do the rest.

Buying low

Would investors then be well advised to buy as oil hits another bottom? Those still with cash to invest might well be advised to do just that, and any other asset class associated with oil for that matter.

For the Arabian oil economies that means another flirt with a near death experience that will turn out all right for those with the stomach for volatility and solid finances, although this might prove the last straw for some over leveraged investors unable to handle another down cycle.