I missed this one, yesterday:

Crude oil fell below $90 a barrel in the biggest weekly loss in two and a half years on concern slowing economic growth will cut energy demand, and as Saudi Oil Minister Ali al-Naimi said supplies in the market are ”ample.”

Very interesting. I still don’t believe the Saudis, but that’s fine. It’s interesting to get a feel for how much of the oil prices had been speculation, since the decline in US consumption spending doesn’t translate to that sort of drop in oil prices. I don’t like speculators so I view this as positive. The Oil Drum also called a similar thing, earlier in the week.

One wonders how sustained this will be. A colleague had insisted the other day that oil with be in the USD70-something range in no time. I told him only if the US dollar itself jumped back to its old stomping ground, and I don’t see that happening, either. Meanwhile, there is a very legitimate question over how much difference, in the medium-to-long term, the US contraction makes:

OPEC countries will rival China in global oil demand growth through 2008 and beyond, according to a report released Friday by investment firm Lehman Brothers Inc. (LEH).

Consumption of oil in countries that are members of the Organization of Petroleum Exporting Countries should grow 4.4% to 370,000 barrels per day in
2008, putting the producer group behind only China in terms of incremental demand growth, according to the report.

More than 50% of this growth will be experienced in Middle East OPEC members, with Saudi Arabia the country with the largest demand of 105,000 barrels of oil per day.

Meaning (a) oil has about 6 months, tops, to depreciate in price, before slack is taken up by everyone else (although China, too, is due for some degree of slower burn in its economy), and (b) when the US picks back up again, the pressure on oil will be very intense indeed. In fact we should think less about the current march in oil prices and more about the next one. Prices for oil, reflecting demand for oil, should be cyclical like anything else. However, with ever-squeezing supplies, the up-cycles are going to become increasingly intense while the down-cycles offer less and less alleviation – just like food prices. As I said (or rather, quoted) previously, the rules of supply and demand never go away.


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