Oil Prices Drop Due To Sunshine

“Oil Drops $6 on Easing Storm Worry”

That’s a headline from Reuters. Here’s the lead:

LONDON (Reuters) - Oil tumbled to below $136 on Tuesday, dropping by about $10 this week, as the dollar gained and concern eased over an Atlantic hurricane.

Reuters would have you believe that oil has dropped nearly $10 in the last two days because, in part, the fear of a hurricane in the Atlantic is abating. This defies logic and credulity.

For this to be true would require oil to have been elevated by $10 based on worries of the storm in the first place. This is just not the case. While the price of crude increased at the same time as the storm began to form, the causal linkage is not born out. What’s more disturbing is that the article goes on to ascribe the increased price to rising tensions over the Iran’s nuclear program as well. This taken with the continuing protests that crude prices are so high because of supply and demand – despite the fact that demand has been reduced and that, over the last several years price has exponentially outstripped demand increases – is beginning to reveal the severe limitations that conventional reporting services are faced in explaining petroleum price formation.

If crude prices are being artificially inflated by speculation and we are witnessing a petroleum bubble, then sudden and sharp decreases in price may occur as the bubble bursts. These decreases will be due to a precipitous sell-off by speculators who have decided that price is too high or that it simply won’t continue increasing.

It’s unclear what it will take to cause this and it may not be strictly speaking rational, but the price reduction will be quick and prices may reduce to as low as $70 or $80/bbl.