NEW YORK, 20 August 2007 — Speculative investors are cutting their exposure to oil futures amid fears of wider economic problems, but experts are divided over whether the fall signals the end of crude’s four-year bull run.
Oil prices have fallen to a seven-week low from their record high of $78.77 on Aug. 1 amid heavy selling by funds despite strong demand, bullish US oil inventory data and threats of hurricane disruptions.
Experts say the speculative selling may be part of a flight from risk and an effort by some funds to raise cash for margin calls in other asset classes.
“Clearly, speculative money is coming out of the market, but it will be quite a while before any economic slowdown eats into demand,” said Mike Fitzpatrick of MF Global. The heavy selling is obscuring bullish market fundamentals that should be supporting prices.
“Prices are moving not due to fundamentals but to exogenous factors, and the only thing that could turn it around right now is if we get a nasty hurricane,” said Jim Ritterbusch of Ritterbusch and Associates in Galena, Illinois.
Oil prices have nearly tripled from $25 per barrel in early 2003, driven higher by robust demand growth in China and other developing countries, tightening global supplies and the influx of investor money.
Some experts suggested the selling could even push oil to test its 2007 low of $49.90 set in February if there is a sudden market rush for the exit.
“There is talk that some people are being forced to liquidate positions because of margin requirements. That would only accelerate the sell-off we have seen,” said Eric Wittenauer of A.G. Edwards.
However, concerns over the health of the global economy could also be driving the selling, say some analysts.
“Oil getting hit hard does not necessarily suggest it’s being targeted as a source of cash, but more of a risk reduction as well, as commodities are not the place to be for a downturn,” said Caprock Risk Management analyst Chris Jarvis.
Oil bulls acknowledge the speculative selling but point to strong global demand and tight supplies as support.
“Developments in data flow, price action, trader position and the presence of significant hurricane risk all appear to be creating a platform for another move higher,” wrote analysts at Barclays Capital in a research note.
US crude oil inventories have declined for six weeks in a row, cutting stocks by over 17 million barrels even as oil product supplies, the force behind much of oil’s recent strength, remain tight.
Bears, on the other hand, believe the subprime crisis is either causing or is a symptom of an economic slowdown.
