Gas prices have fallen $.50 in the last two weeks at the gas station I go to. Because the reserve currency of the world (the dollar) is pegged on the price of oil, "The dollar fell when oil rose, and now it is rising as oil falls." So when the money flooded into oil and other commodities after the start of the credit crisis last year, oil prices shot up. It shouldn't be surprising that speculators now contol 48% of the oil futures in world markets.
From one view (Which jibes with my take, but says it a whole lot better than I could):
Maybe it is where all the "liquidity" went when Bernanke pushed rates down to 2%. The spike up to $140 looked awfully steep - the sort of thing that occurs
with commodities as they top out (see corn, wheat, copper, and all the other
commodities that have now topped out).
The trend line supporting this spike
crosses near $115 now, so we are approaching critical support. If oil can hold
here, it has the possibility of racing up to test its high or set a new top
around $170. If it cannot maintain support, it heads back to its break-out point
around $85. There it will rest awhile before heading even lower as the global economy shrinks even more.
This new speculator data suggests there is a lot
of hot money in the system that is liable to panic, so there are somewhat better
odds oil will not hold support at $115.
Then where does the hot money go?
Probably out of the euro and other hot currencies, back into the dollar and safe
instruments like Treasuries. In other words, the hot money is going to panic
again about credit risk, which implies there are some more surprises in the
banking industry ready to be revealed.
There is a lot of money sloshing about the system now. The money that two years ago would be looking at CDOs and other mortgage backed securities had jumped into commodities index funds. With demand destruction evident in Europe now, the money sloshes again. Of course, this is only one leg of this three-legged stool. The sturdy second leg is composed of Demand destruction combined with the possibility of peak oil supply caps. The third leg is tinfoil hat land. (This includes the idea of Saudi Arabia starving the U.S. out of Iraq, in the same way as it flooded out the Iran-Iraq war with cheap oil. Notice the price drop from the start of the war in 1980 to its end in 1988 and the run-up in prices from 2003 on.)
