Oil is up 30 percent in three months after peaking above $135 today following this week's ho-hum report on U.S. supplies. The general sentiment among investors, even in commodity pits, is that there may still be room to rise, with analysts predicting oil could top $200 a barrel over the next couple of years—if not earlier. But just as there is a seller for every buyer, there is a bear case for every bull case. So here are a few scenarios that could push prices back down:
1. Investors pull back.
Institutional investors—pension funds, hedge funds, sovereign wealth funds—could decide commodities are a less attractive proposition and take profits after a year of record-breaking price increases. "The market could fall under its own weight in the near term. You've got to question how much more money can come into these markets at this point in time," says Eric Wittenauer, an energy futures analyst at A.G. Edwards.
2. The dollar gains
The greenback recovery is far from assured, but for now it has managed to bounce off mid-March lows. The U.S. Dollar Index hit a yearly low of 70.96 on March 14 and has since recovered to a bit above 72. But that improvement hasn't been enough to stop crude's rise, even as hopes for a bottom to the dollar's decline improve as the Federal Reserve decides to end two years of rate cutting. It might take a move by the G-7 countries to support the dollar. G-7 officials "talked up" the currency a bit after their April 11 meeting following the blowup of Bear Stearns. It's not clear they'll do more talking soon. "We're going to have to see some strength in the dollar to pull some of this investment money out of oil," says Darin Newsom, a commodity analyst at DTN.
Article Source: http://www.usnews.com/articles/business/economy/2008/05/21/6-reasons-why-oil-could-plunge.html
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