Oil continues to fall, slipping about 1 percent to $113 a barrel this morning. And that’s despite the Georgia-Russia conflict that threatens one of Europe’s most strategic arterial pipelines.
An immediate $5 upward swing in the price of oil would have been a plausible reaction to the conflict “under normal circumstances,” RBS Sempra economist John Kemp told Reuters last week. So what is going on?
What’s different this time seems to be three things. First, bearish economic data (including a report from China that oil imports fell 7 percent in July) has convinced traders that the global economy is weakening, putting downward pressures on oil prices and strengthening the dollar.
Secondly, hedge funds continue to unwind the short dollar-long oil positions that propped crude up to the heady heights of $147 a barrel just last month. Speculative short positions outnumbered long positions by 5,550 contracts on the New York Mercantile Exchange last week, according to the Commodity Futures Trading Commission.
Thirdly, no one seems quite sure of where the conflict is headed or Russia’s ultimate intentions. There’s optimism that “In New Russia, business is business” – i.e. the country will seek to avoid further spooking the Western investors that have become so important to its economy.
Either way, the news isn’t good. Either the outlook for the world economy will continue to out-bear any short-term upward pressure on crude, or we’re about to see yet another oil spike. We’re using our own tin hats, but we hear the Russian army has some spare helmets.
Related links
Q&A on WTF is Going on with Russia and Georgia, Part I - Dealbreaker
The return of Russian bears – FT Lex
Losers: Georgia and Russia – FT