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1. A Week to Remember

Oil rose to a record just below $112 a barrel last Monday and then fell precipitously in the wake of the turmoil surrounding the Bear Stearns buyout. Initially, the dollar fell to a record low against the Euro on fears that other firms might be in financial trouble, but later on Monday oil and most other commodities fell rapidly as traders tried to comprehend a shifting financial landscape.

From a high near $112 oil fell to $102 a barrel on Monday. Tuesday, Wednesday, and Thursday, in a short trading week, were equally as volatile with oil oscillating up to $109 and at one point getting as low as $99.59 a barrel before closing out at just below $102. Overall commodity prices last week saw their biggest drop since 1956.

As with nearly everything else about the financial markets, opinions are mixed as to just what is taking place. Some observers note that much of the drop in commodity prices came because speculators were forced to sell out profitable positions in commodities to meet new margin requirements associated with bailing out Bear Stearns. Others see the weeks events as a signal of tougher economic times ahead that will lead to reduced demand for all commodities.

Goldman Sachs sees oil prices slipping to circa $90 a barrel in the next two months due to seasonal factors and reduced demand. Others are impressed that a massive unwinding of futures positions has still left oil above $100 a barrel. The weekly US stockpiles report showed a less-than-expected growth in crude and gasoline stocks, while distillates continue to slide. Many are now observing that unless the report is wildly at variance with expectations, the US stockpiles report, which until recently drove oil prices, is getting lost in the financial news.

2. Decoupling

Most acknowledge that the US is entering a period of economic recession which, depending on ones point of view, may last anywhere from months to years. The key question for the oil markets is what will happen to the demand for oil as the US, and those that depend on the US as a market, decline. Last week the EIA reported that US consumption of petroleum products over the last four weeks is down 3.2 percent from the same period in 2007. Despite record prices, however, US demand for gasoline was down by only 0.1 percent in the same period.

Since speculation about the US entering a credit-induced recession became rampant several months ago, conventional wisdom has been that a US recession would soon spread across the world and that demand for oil would slacken as it has in the past. For several months now oil prices have been falling on bad economic news and recovering on good.

During this time there has been much discussion as to whether the economies of Asia and the oil exporting states have become so large and powerful that a recession in the US and parts of Europe will no longer have the same economic impact that it once would. This "decoupling" is at the heart of the debate as to where oil demand will go in the next year or two.

While some US demand for oil products is already declining with a slowing economy plus record high prices for heating oil, diesel and jet fuel and gasoline, so far the reduction in demand is relatively small. Patterns of US oil consumption have changed from what they were 35 years ago, so opportunities and incentives for reduced consumption without major disruptions are few. Thermostats on oil burners can be dialed back, airlines can cut flights and ground inefficient planes, and discretionary automobile travel can be curbed.