For us here in India what is interesting to note is that the Indian oil companies do not source their oil from the North Sea or Texas. Still prices went sky high on “global cues” and they still are hovering at July levels. Even more interesting, I am told that Reliance reports prices of approx $88 on their balance sheet which could be a fair indication of what the real price is.

With Keneth Rogoff, ex-IMF chief economist, predicting further crisis in the US financial system which even the sovereign wealth funds from the arabs will be hard put to revive (http://www.informationclearinghouse.info/article20557.htm);can one expect the crude prices to drop below $100/barrel?

Presently, the price is hovering around $115 with a 1 year forecast of $150.

My point was that commodity market speculation especially the CFD market based on oil futures is possibly driving prices further still. The Intercontinental Exchange (ICE) based in London has recently been in talks with US counterparts to reign in some of it. It is being debated but the fact is when investors play the oil futures market with such instruments prices can be affected.

The Business Week article I refered to was more to point out that speculation in oil is a major factor in the current oil price scenario. The fact that US demand is going down is a result of high prices. What this has done is create a bad sentiment and is probably going to attract legislation on commodities trading. I believe this is going to result in less people taking positions on futures contracts.

I have to clarify that the contracts for difference market or CFDs was on my mind when I made the initial comment. At the moment on the CFD market the initial margin is only 1%. Based on a 100 barrel contract of $13,600 of West Texas or Brent @ say $136/barrel, the initial margin is only $136. Also there is no time limit. CFDs have no time frame to closing out the contract. This is definitely an attractive place to be and in my opinion many of the institutional investors are right there right now.

Look for july 21st, 22nd. Expiry of current month futures. If the price remains at current level, we can safely assume that there is not enough demand at 147$/ barrel. Price on july 22nd is the real price as the current month futures expires. To get a better idea look at spot prices. Somebody is buying oil at 130$/barrel.

To nikhil
Since oil is the backbone of economy, reduction in oil consumption can be translated into recession for US (ie) demand drop for oil in US means recession for US. lly demand drop for oil from world will mean global recession.

Analysts say that while oil traders have been betting on surging demand from developing countries such as India and China, reduced demand in the U.S. is now sending bearish signals the markets can’t ignore. Moreover, Energy Dept. data released July 16 showed a 3 million barrel jump in U.S. crude inventories, to 296.9 million barrels; analysts had expected a decline. Moreover, U.S. demand for energy products has fallen 2% from the same period last summer, according to a four-week average federal regulators release weekly. “I think this is a precursor to a much bigger sell-off,” says Peter Beutel, president of Cameron Hanover, an energy risk-management firm in New Canaan, Conn. “It’s very possible we have seen the worst this [price surge] is going to do to us. The tide is starting to change.”

Since the U.S. consumes a quarter of the world’s gasoline on a daily basis, lower U.S. demand has a “huge ripple effect” on the market, and that is starting to be reflected in prices, says Fingerman, who considers $80 oil possible by year’s end. “I think it’s the beginning of the end,” he says. “The fundamental data just keeps getting more and more bearish.” Another oil contrarian, Lehman Brothers (LEH) energy economist Edward L. Morse, sees oil in the lower $90 range by 2009. “The drop in demand (BusinessWeek, 7/16/08) has been astonishing, particularly in the U.S.,” Morse says.

The relatively low initial margins required to play oil futures has definitely had its effects on oil prices. It would be interesting to see oil price behavior if margin money was increased by the clearing houses.

American innovation historically is at its best when there is an underlying capitalistic incentive and urge to innovate for that specific cause. Painfully high gas prices at the pump definitely is good for the globe in the long-run considering vast amount of brain-trust redirected towards finding an alternative to oil.

~$4 billion USD pumped into outcome-driven research in alternative fuels by venture capital over the last 18 months would be a game changer going forward.

Look at these Capitalism-driven innovations transforming our lives around computing, healthcare and energy, if you need living and breathing exampes of ground breaking innovation:

Automotive-class LithiumIon from A123 getting us a car from GM and others in the next 12 months with <70centsPerGallon (compare that to $5).

Blockbuster biological drugs from Amgen and Genentech (ex Herceptin) literally rewriting the cancer survival rates every month.

ShrinkWrapping a transistor from the size of a hand to 1/100 th size of a single red blood cell (using 45nm Hafnium) by intel.

Commercial production of cellulosic ethanol (ethanol from gas, husk or wood) based on proven Fischer-Tropsch process (instead of expensive enzymes) by range fuels.