The price of crude oil on the NYMEX as been following the S&P 500 stock index closely since May of this year, and the S&P is set for a big fall, according to analyst Wayne A. Corbitt. (image: seekingalpha.com)

The financial world is full of professionals who predict oil prices. Some focus on supply and demand, others focus on geopolitical factors, and others base their predictions on patters, correlations, or other mathematical clues.

An oil price prediction published on the financial blog Seeking Alpha on Friday used this third type of analysis, generally referred to as technical analysis, to predict that the price of crude oil will soon drop below $60 a barrel. The prediction, from market technician and analyst Wayne A. Corbitt, looks closely at the strong correlation between crude oil prices and the US stock market, as represented by the S&P 500 index. Corbitt illustrates that crude oil (West Texas Intermediate, or WTI grade crude oil) prices and the S&P have been moving more-or-less in tandem since August 2008 and concludes that recent declines on the stock market will soon lead oil prices lower. He also declares,

crude oil has been tracking very closely with equities for the last two years and is being controlled only by traders and investors seeking risk.

This evaluation clearly falls in line with observations by HeatingOil.com and others that fundamental factors like supply and demand have less influence over oil prices now than perhaps ever before. Instead, stock markets, the value of the dollar, and other financial considerations seem to be the more influential determinants of oil prices.

Corbitt also based his prediction on recent patters within the oil market, specifically open interest (the number of open contracts—contracts that can be re-sold—held by traders) and volume (total trading activity). He showed that open interest in the crude oil market has been declining steadily since oil hit its nine-month low in May of this year, meaning that traders’ interest in crude oil has been falling for the last four months. As fewer traders buy crude contracts, demand for the contracts declines and price increases, especially in the form of rallies, become less likely. Looking at crude’s trading volume, he noticed a downward trend since May and interpreted that as a sign of prices dropping in the near future. In his words,

When volume is in an obvious decline as prices advance, however, that is a sign once again that the necessary support structure for higher prices is absent, thus opening the door for sellers to take control.

In conclusion, Corbitt chalks up recent increases in oil prices to outside (non-fundamental) factors, writing, “Crude oil’s inability to trade on its own merits has no doubt helped sustain its higher price level.” With oil prices’ tendency to follow stock prices, and expectations of stock market declines to come soon, the product of Corbitt’s analysis is an outlook that includes falling crude oil prices in the near to medium term. According to his vision, the per-barrel price for crude will dip below $60 well before surpassing $100.

As with all oil price predictions, the accuracy of the one described here is impossible to pin down. That being said, Corbitt’s simple and direct analysis (supported by fairly straightforward charts) makes a compelling case. His technical analysis also gets support from fundamental factors: a weak US economy is keeping down demand for petroleum products, and fuel supplies (including heating oil) are at record-high levels. If he’s right, and crude prices fall below $60 in the next month or two, that would go a long way toward knocking five cents per gallon or more off of current retail hating oil prices right as the heating season kicks off.

(image: lpi.usra.edu)

Burning fossil fuels plays a well-known role in causing climate change, but a new scientific paper analyzes how fossil fuel mining—never mind burning the stuff—could also affect the climate by changing the shape of the earth, reports the blog Seeking Alpha.

According to the paper, which will be presented in India at the AGU Chapman Conference on Complexity and Extreme Events in Geosciences, the extraction of fossil fuels may have a noticeable impact on the earth’s total mass. For you math whizzes there’s some talk of “the moment of inertia” and “the angular frequency of the earth,” but the gist is that extracting so much oil from the northern hemisphere may have upset the earth’s balance and tilted it. More tilt could mean more extreme summers as the earth revolves around the sun.

This is only one paper presented at one conference, so it’s not exactly well-established science, but if it’s true we would agree with the paper’s author that it “[makes] the process of climate change such as global warming more complex to understand.” Not that we really understood it in the first place.

A strong dollar could keep oil prices down in 2010. (image: weakonomics.com)

Forces such as emerging market demand, speculation, and a weak dollar—all of which have supported higher oil prices in 2009, despite a recession—may not sustain oil prices in 2010, according to an article published on Seeking Alpha on Monday. First of all, signs exist of a global tightening of monetary policy, said author Peter Cooper. In addition, the true strength of emerging market economies, such as China, is being called increasingly into question.

Third, the US dollar is recovering after an extended decline against the euro. Cooper cited weak global demand caused by the recession as a fourth reason that oil prices might be lower in 2010, as demand could lag even as the global economy lurches toward recovery.

Some analysts agree with Cooper, a Dubai-based financial journalist specializing in Middle East business and finance. Deutsche Bank’s chief energy economist Adam Sieminski predicts a stronger dollar in 2010, which he believes will ultimately put “downward pressure on the oil market, or at least take away a support.”

As the dollar rises, commodities traded in dollars, like crude oil and heating oil, tend to decline in value because they become more expensive to investors who hold foreign currency.

In addition, optimism regarding the dollar raises the possibility that the US could hike interest rates in order to head off inflation. If interest rates do climb, look for the dollar to gain even more strength and intensify the downward pressure on commodity prices.

Which direction will oil prices turn? Another analyst predicts falling oil prices. (image: beastiekeith via flickr.com)

Seeking Alpha, a prominent website that analyzes all things related to investing, has posted an entry suggesting that the price of crude oil will continue to fall in the upcoming weeks. The primary reason is due to the market fundamentals: supplies of oil are extremely high while demand is relatively low, as others have also indicated. In addition, recent comments by Ben Bernanke may contribute to the price decrease; by suggesting that the American economy still faced problems, investors moved their money out of commodities such as oil and into the dollar, which pushed the price of crude downwards. But, with weak fundamentals, the dollar doesn’t need to rise for the price of oil to drop; it only needs to stabilize.

Dubai skyline. (image: seeker401.wordpress.com)

Will supply and demand finally bring down the price of oil?

That’s the question asked last Wednesday by Brad Zigler at Seeking Alpha, who suggests that the high supply and low demand of oil could cause the price of oil to fall over the next few weeks. After eclipsing the $80-per-barrel-mark earlier this year, the price of oil has slowly dropped; late last week, the benchmark oil futures contract was briefly selling at $72.39, its lowest point since October. Many analysts, such as Pierre Lorinet, CEO of commodities trading company Trafigura, have said that market fundamentals indicate that the price of oil is far higher than it should be. It’s also quite possible that oil prices could fall if economic turmoil in Dubai and the strengthening of the dollar continue.

A worker builds wind turbines at a GE factory in Shenyang, China. (image: ge.com)

China has been investing in US clean energy projects and many are not happy about it. Last week it was the announcement that China-based ENN will be teaming up with Duke Energy to bid on contracts for utility-scale solar farms and large commercial solar projects in the US.

This week it’s China’s role in a large-scale wind power project in Texas, reports the New York Times. Many unhappy readers wrote to the newspaper after learning that China, along with a coalition of other investors, will be financing the project. The outrage is over the possibility that some of the monies might come from the $22 billion of the economic stimulus package marked for clean energy projects and, more importantly, new jobs.

Although the project will create a few hundred jobs in the US, many more—approximately 2,000—will be created in Shenyang, China, where the 240 new wind turbines will be manufactured by A-Power Energy Generation Systems. The 600-megawatt wind farm will be the largest Chinese investment in US renewable energy, and is expected to cost about $1.5 billion.

The angry letters prompted a politically expedient response from Cappy McGarr, a managing partner with U.S. Renewable Energy Group (US-REG), a partner in the Texas wind deal along with an Austin-based wind developer, Cielo Wind Power. McGarr emphasized that the wind farm will go far in helping the US attain energy independence. Without this international partnership, he said, the project would not have been possible, and the resulting jobs and revenue would not exist. He added that many of the parts for the turbines would be made by General Electric.

Reaction to the project has not been positive. Douglas McIntyre at Daily Finance called it “a sad day for the U.S. renewable energy business,” and said, “it’s a sign that the campaign for America to rely less on fossil fuels is gaining some traction, but the tools to allow it to happen will be marked ‘made in China.’”

The Wall Street Journal’s coverage was more neutral, pointing out that Chinese companies will be involved in the sort of higher-value services that white-collar America needs. Seeking Alpha wonders if one of the best places to work in the future may be at a US subsidiary of a Chinese company.

About 330 jobs will be created in Texas as a result of the project, according to the Department of Energy’s National Renewable Energy Laboratory JEDI (Jobs and Economic Development Impact) analysis. About 734 indirect jobs will also be created.

Michael Kanellos at Greentech Media weighed in with a discussion about how the deal represents a significant shift from the past several years, when China wanted to remain anonymous about its investments. This, Kanellos maintains, is more proof that China wants to make a serious mark in green energy in the US.

But China has been making a mark in the renewable market in the US for some time; they were just much quieter about it. Russ Choma, a reporter with the Investigative Reporting Workshop, a nonprofit investigative journalism project attached to the American University School of Communication in Washington, told the New York Times that China has long dominated the solar panel manufacturing industry, of which 95 percent of its total output is exported to the United States and Europe.

Choma also noted that when it comes to stimulating the economy, it is the manufacturing that matters. He points to a 2004 study from the Renewable Energy Policy Project, a research institute based in Washington. The institute found that every 1,000 megawatts of installed wind capacity had the potential to generate as many as 4,300 jobs, of which about 3,000 are created at the manufacturing level.

But until that happens, we can expect to read more letters like this one that appeared in the Times.

“Thank you for killing the U.S. windmill industry,” wrote a reader from Chicago at the Times’ Green Inc. blog. “Thank-you, U.S. industrialists and financiers, for having us buy these things with financing and grants emanating from money borrowed from China.”