Could Oil Fall to $60 This Year?

06/03/2011 9:57 am EST

Focus: COMMODITIES

Daniel Gramza

President, Gramza Capital Management, Inc.

The fundamentals support a big drop in crude even from today slightly diminished levels, but the key factor to watch is the US dollar, says renowned commodity trader Dan Gramza in this exclusive interview with MoneyShow.com.

Dan, as you know, there has been all kinds of interesting action in the energy pits lately. We saw Brent crude go over $120 a barrel. We’ve seen, in the US, gas prices topping $4 a gallon in a number of states...and yet lately, there’s been kind of cooling off. The oil prices have come down a little bit. What do you see happening in the energy pits?

Firstly, Howard, I really feel fundamentally that crude oil should be $60 or $70 a barrel.

$60 or $70?

Yes, I do. And here’s why I feel that: If you look at global supply right now, we have more oil in the United States than we know what to do with. Cushing, which is where WTI is stored...

The West Texas Intermediate.

West Texas Intermediate, that’s right. The benchmark crude oil that we use in the United States for the futures market. That’s overflowing. They don’t have enough storage there.

If you look at demand in the United States, we’re going down. We’re down 2% of demand for gasoline, right? So, we have decreasing demand and we have increasing supply.

Even if we look at the situation in Libya right now, the issue there is most of that crude oil is consumed in Europe first. There is a pipeline that connects to Italy that sends them 244,000 barrels a day. They produced about 1.6 million barrels a day in Libya pre-conflict. But Saudi Arabia has an extra 5 million barrels a day.

They are taking up at least some of the slack.

Well, Azerbaijan's Socar, they are selling oil to Italy, so we’re not really seeing—so far, globally—an issue of supply.

So when the [US] government was talking about opening our strategic reserves, I didn’t know what that would change. I didn’t see any benefit to that at all.

On the flip side, though, we have seen enormous amounts of speculation. We have seen people long crude futures three to four times the volume they were back in 2008, when Congress was having hearings about speculation. I mean, is this really due to speculation in the markets?

That’s a great point there, Howard. I have to tell you, personally, from my perspective, I don’t think it’s just strictly the speculation idea.

Let’s look at another issue here that is why I think crude oil prices did move up. That is this: Crude oil, as you know, is priced globally in US dollars. If I’m a producing oil company and if the US dollar is going down, which it has been, my income goes down. As I take those dollars to try to change into my currency, I get less, right?

So you have to increase the price in order to compensate for the lower dollar.

There you go. I feel that the increase in prices for crude oil has really been currency-driven, more than it is speculation on supply or demand.

Ah, but haven’t speculators been speculating on the currency by bidding up crude oil?

I don’t know if they’re bidding it up as much as the demand for increase in prices are there because of the weaker dollar, because of that income going back down for those oil-producing countries.

It’s kind of a combination of all of those. If you look at where interest rates are, if you look at where the currencies are, if you look at perception...if you think about crude oil, a big chunk of it moves on perception.

So, as our stock market, if people think less energy demand, prices go down. We see our friends in Canada. Their currency fluctuates tremendously with the value of crude oil, because they are the largest importer of crude oil to the States.

So, very, very quickly. Do you see crude oil—I mean it peaked recently. But do you think we’ve seen the highest for crude oil for the most part for the year? Do you see it trending down?

Well, I think fundamentally—barring any unforeseen news item—yes. I really feel that we do have that potential to see crude oil actually backing off more. I wouldn’t be surprised if it would do that, but I think the key thing for us is going to be that US dollar.

Related Articles on COMMODITIES