Oil's Double-Digit Slide Shouts "Sell!" to Some

By Jennifer Yousfi
Managing Editor

Oil's recent wild ride has some market experts questioning which way black gold is headed in the weeks, months, and even years ahead.

Oil dropped over 11% during a volatile week of trading, as reduced consumer demand put downward pressure on the once hot commodity. Crude oil for August delivery ended the week at $128.88, its lowest level since June 5 and well off its July 11 peak of over $147 a barrel.

"If this is not the [crude oil] bubble's implosion, than it's a reasonable facsimile," analyst and trader Stephen Schork said in his daily market commentary, the Associated Press reported. "Perhaps all we have witnessed was a replay of last August's subprime induced sell-off. Time will tell.
Nevertheless, for the time being we no longer care to hold a bullish view."

Mid-week, the Energy Information Administration reported that U.S. consumer demand for gasoline had fallen 2.1% from the same period last year due to high oil prices. And while that certainly had an effect on the price of crude, some unusual buying from Mexico might also be to blame.

A handful of analysts told CNNMoney.com that Mexico's state-owned Petroleos Mexicanos, or PEMEX, the fifth largest global oil producer, was signing contracts at current prices for years into the future. Some say it's a sign that Mexico is betting oil prices have peaked.

"This is a smart move," Phil Flynn, senior market analyst at Alaron Trading in Chicago, who also thinks there's a good chance prices have peaked, told CNN. "If I were an oil producer, I'd want to lock in these prices."

Others have written the contracts off as just an attempt by the Mexican government to do some long-term budget planning. And while that could be true, if other large oil producers follow Mexico's lead and start to put similar long-term future contracts in place, it's going to push down the price of oil.

"I don't know who else is doing it," said Nauman Barakat, an energy trader at Macquarie Futures, and one of the traders who mentioned the Mexico news in a research note. "There's been a lot of talk, but it's kept very confidential."

When asked if such moves could cause oil prices to sink lower, Neal Dingmann, senior energy analyst at Dahlman Rose & Co., didn't equivocate.

"Absolutely," Neal Dingmann. "It could create a top in [oil prices] in the near term."
Analyst Olivier Jakob of Petromatrix in Switzerland told the AP that Nymex futures were "getting into deeper trouble," based on his technical analysis of how oil prices were developing.

"Buying here is an opportunity if you are a deep believer in $200 (a barrel), otherwise we think that caution would be better applied," Jakob said in a research note.

But not everyone is trying to lock in today's prices for tomorrow's sales. Industry giants like Exxon Mobil Corp. (XOM) don't even play the futures game according to Fadel Gheit, a senior energy analyst at Oppenheimer & Co. (OPY).

"Exxon produces 1.2 billion barrels of oil a year," Gheit told CNN. If Exxon Mobil locked in all that production for five years out at today's prices, and crude fell 20%, "it would be a disaster," he said.

And you won't see a member of the Organization of Petroleum Exporting Countries doing deals similar to Mexico's. OPEC members like to have the flexibility to produce less to drive up oil prices. Those nations won't give up any potential price control by locking themselves into contracts too far out into the future.

"You get stuck with this extra production that's out there," John Kilduff, an energy analyst at MF Global Ltd. (MF) in New York, told CNN. "Then OPEC has to reduce market share just to maintain price."

News and Related Story Links:

  • Associated Press:
    Oil markets looking for signs of bubble burst