Is cheaper oil here to stay?

Crude oil prices have slipped more than 20 per cent in just about a month. Have the market fundamentals changed dramatically and will lower prices sustain? And, don't speculators deserve some credit for this correction? By Vivek Sharma

The Russian offensive against Georgia was the litmus test, not for NATO's resolve against its Cold War enemy but for international crude oil price trends. The test was whether the recent decline was only a short-term correction after the eye-popping surge earlier this year or the start of an intermediate downtrend. Until mid-July, it didn't take events as significant as the Russia-Georgia conflict to ignite oil prices. Even minor developments used to push up prices by $5 or $10 per barrel, in a day.

When news of the Russian incursion first broke, crude oil prices broke the downward spiral and made a feeble attempt at recovery. After rising slightly over $1 per barrel in opening trades that day, prices slipped again and ended lower.

It seemed as if not even a war could push up crude oil prices. When the threat of a storm on the US east coast a few days later also did not move oil prices higher, the verdict from oil analysts and commentators were near unanimous. Crude oil prices have peaked for the intermediate term and will remain subdued for a while.

Barely a month after oil prices set a high near $150 per barrel, is it too early to make that call even if prices have slipped more than 20 per cent from the peak? Or, have market fundamentals changed substantially enough? Have all the oil speculators who were pushing up oil prices been browbeaten by the veiled threats and rhetoric of politicians?

Why not credit the speculators now?
When crude oil prices were on the way up until mid-July, politicians of all ideological hues the world over blamed just one group of market participants - devious speculators. We were told that trade excessively in commodity markets, push up prices and make billions of dollars in profits for themselves. Their billions in profits were looted out of ordinary tax-paying consumers, who saw the prices of everything go up and their lives turn even more miserable. The speculators must be reined in and the world will be fine again.

To establish the evil nature of speculation, regulators were unleashed. In the US, the Commodity Futures Trading Commission was asked to do a detailed study. Its early finding was that only about 38 per cent of all trades in crude oil on the NYMEX were by non-commercial traders, or the so called speculators.