6 Reasons Why Oil Is Ready to Drop

Strategist Yardeni pricks the bubble.

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I think the "oil is in a bubble" meme is gaining strength. Market strategist Ed Yardeni thinks the hysteria may be ready to wane. His reasons:

1) Russia is scrambling to cut taxes on its oil industry to boost investment in new fields and to reverse a looming decline in production.

2) Brazil continues to find more oil offshore in the Santos Basin, a collection of potential oil fields that could be one contiguous megadeposit of crude oil.

3) In the US, Congress may start considering ending longstanding bans on domestic drilling.

4) Asian countries are starting to reduce their domestic fuel subsidies, which could dampen demand.

5) Americans are driving less. The Transportation Department reported Friday that in March, Americans drove 11 billion fewer miles than in March 2007, a decline of 4.3%.

6) American Airlines said it would reduce flights in the face of soaring fuel costs. Air France warned of a profound restructuring of the world airline industry.

It may be time for some of the super-spike and super-super-spike prognosticators to declare victory. In other words, it may be time for an oil change, or a change in their story. The right price range for oil may very well be $100 to $150 a barrel rather than $150 to $200.

Economist Robert Brusca is also a believer in the Bubble (bold is mine):

As oil hit its high price in the OPEC cycle in 1980 it turned to skid lower and was under $12/bbl by 1986. We may not have to wait that much longer for prices to erode this time. Oil prices rose by 500 percent by the seventh year from the start of the spiking process in the OPEC cycle. In this cycle at the seven year mark market prices were up by 362%, a noticeable amount to have spurred some conservation. The latest excessive push in prices is much newer but the forces of conservation are already in train. And have been for three years since that 362% net jump. Price has just made another leap higher as well. If price stays high the forces of conservation should work faster.

This is not to argue that China's or India's demand might not come back to be a force later. Nor is it to deny that a certain psychology is in train that seems to ignore the facts of supply and demand right now. Markets are locked into some odd scenario that features an impending oil shortage. But sooner or later the real supply/demand situation makes itself known. The point is that high prices bring some of their own remedy with them. We should not forget it or sell the effect short even as markets are caught up in bidding oil prices higher as they were in late 1978 through 1980. History may prove to be a better guide to future oil prices than we now imagine. This is why I consider oil prices to be a bubble. Oil has reached a level that it will not be able to sustain—at least not without some significant retrenchment.