Oil to sink to $100

Oil at $100? That’s certainly my call and I’ll stick to it. So far my call of oil peaking at $150 is holding.( We’ll see for how long). On July 9th, after oil’s first pullback to $138 I said:

Yesterday, oil fell the most in one day since the start of the Gulf War in January 1991 to close at $136.03 in New York trading. Now is the time to evaluate whether we have seen the top in oil prices? On Thursday in my post “Oil close to $146” I said,

The price action makes me think we are nearing the top here. I’d call $150 a peak. Many have called a peak before so let’s see what happens going forward.

I would like to reiterate that sentiment here with oil still being quoted below $138 in overnight trading. As I see it, a tight supply due to low Iraqi output from the war in Iraq, refiners’ inability to process heavy sour crude, and peak oil production led to a super spike in oil prices. The response has been demand destruction in the North America and Europe coupled with a reduction of oil subsidies in Asia.

Ultimately, the oil-induced inflationary spiral combined with the financial crisis has brought the world to the brink of recession with economies slowing markedly in Europe, North America, ANZ and South Africa. Demand for oil is lower, so prices will soon follow.

This begs the question whether inflation is still anything to worry about. My answer is yes — but not because of actual commodity prices, rather because of much higher inflation expectations getting embedded in the economy. There is always the worry about a confrontation with Iran bringing oil prices back up again (and way up potentially). But on the whole, demand destruction has set in and I expect to see oil prices lower.

If oil prices continue to fall down below $100, we can see the super spike as over. I see oil collapsing to well below $100 in the not too distant future.

Then we can move past inflation to the real worry, deflating credit and asset prices.
– Oil down below $138

Now, on July 22nd, oil has even dipped below $127. I think it’s on its way to crashing below $100 as demand collapses, with a global recession on the horizon. Marc Faber recently said the same.

Commodities and investment guru “Marc Faber, who told investors to bail out of U.S. stocks before 1987’s so-called Black Monday crash, said oil prices may fall to $100 a barrel as demand slows in a global economy at the “tail end” of its expansion.

Accelerating inflation and rising interest rates worldwide are likely to dent the value of commodities including oil, said Faber, who publishes the Gloom, Boom & Doom Report, at an investment forum in Sydney today.
–Commodity Online, 22 Jul 2008

So far, so good in my predictions of a $150 peak and a collapse toward $100. It can’t happen soon enough, as inflation is strangling the global economy.

This might save us from 1970s style inflation, but unfortunately it won’t save the global economy; the massive price decline is only a response to recessionary demand destruction from the previous high oil prices. The damage is already done.