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Oil price is dropping. But why?

Rachel Dornhelm Sep 8, 2006

KAI RYSSDAL: The last time we saw oil at $66.25 a barrel was back in April. On the way up. Couple of months go by, things change. Demand is down, now. Supplies are high. But Rachel Dornhelm reports there’s a little extra something, too.

RACHEL DORNHELM: On the oil futures trading floor oil prices have taken a slick downturn. Trader Mike Fitzpatrick says the record highs were caused by a psychological snowball effect.

MIKE FITZPATRICK: There was a fear premium because of political unrest, beginning with the war in Iraq and contining on with Nigeria, Venezuela . . . you know, the litany goes on and on and on.

Now that many of the conflicts, like Lebanon, have calmed and the U.N. deadline for Iran’s nuclear cooperation passed, prices are dropping. Fitzpatrick says from an economic standpoint, oil should be lower still.

FITZPATRICK: I think that a lot of these speculators that have poured into the market over the last couple of years are taking some profit off the table, or reducing their exposure.To top it off, consumer demand for oil is weakening, says Deutsche Bank energy economist Adam Sieminski.

ADAM SIEMINSKI: Consumers are, I think, starting to react to the fact that their spending power has been reduced by the increases for gasoline, for electricity and for natural gas.

The stock market has seen some relief from the lower gas prices. But the gains haven’t been proportional to the hit stocks took when oil went up. Sieminski says that’s because now stock traders are more worried about interest rates.

SIEMINSKI: The market is still very much focused on whether or not we’ve seen the last of the rate increases and the markets would probably feel better if they felt the economy was in good shape.

And you thought a story about low oil prices could only bring good news.

I’m Rachel Dornhelm for Marketplace.

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