Oil Prices: Is Crude Awakening at $79, or About to Plunge Further?

These days, if you don't like the trend in oil prices, wait a while -- after plunging about $10 in a week, oil popped $2.77 higher to $78.48 per barrel on Wednesday at midday after weekly U.S. oil inventories were lower than expected.

But does the rise mark the end of oil's bearish phase -- oil has fallen from highs near $115 in May to trade below $80 -- or is it merely just short-covering?

The oil bulls argue that despite the slowdown in U.S. and European Union GDP growth, emerging market demand for oil, particularly in China and India, is strong enough to keep oil prices at least flat for the next six months. Institutional investor use of oil futures as a hedge against a weak dollar, higher inflation and/or as an alternative asset adds more buying pressure, and should propel crude slightly higher.

The oil bears argue that subpar U.S. job growth and a contracted workforce has taken more than 10 million drivers off U.S. roads. That combined with Europe's sovereign debt-related GDP slowdown, means global oil consumption in 2011 will struggle to eke out a gain, and probably will remain at or near 89 million barrels per day (bpd). Moreover, those soft demand conditions will combine with a world awash in oil to drive crude lower -- to below $70 per barrel by March.

Gasoline demand remains collared by the weak U.S. economy, and a SpendingPulse report released Tuesday indicated that U.S. weekly demand fell two percent during the week ended Sept. 23, Dow Jones reported Wednesday.

Technical Analysis

You've heard the view of the bulls and bears: What do technical indicators tell us about oil's price?

Oil has been in a downtrend for the past six months, but it's been a volatile move lower --$5 retracements aren't unusual. Still, oil has been below the key, 50-day moving average and the 200-day moving average for two months, a bearish trend. Also, the 50-day recently crossed below the 200-day - and that's known as a "death cross" -- another bearish technical sign. Meanwhile, the MacD Histogram shows more than enough selling pressure to suggest that the late-September/early October selling isn't merely profit-taking.

Oil/Economic Analysis: Where are oil prices headed in the next six months? The bias here is: lower, down to at least $70 per barrel by late January. The mitigating factor in that prediction? U.S. jobs growth: if it rises to better than 150,000 new jobs per month, that would put a floor under crude's price.

Further, the decline in the price of oil, if it holds, represent perhaps the best news for the U.S. economy this year, outside of the end of period of large job lay-offs by U.S. corporations.

The reason? Each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year and every one cent decline in gasoline increases U.S. consumer disposable income by $600 million per year.

Hence, the decline in oil prices represents a de facto tax cut for the American people -- one most probably welcome, given stagnant incomes in many job classifications, and amid pinched budgets, due to cost of living increases.

Further, relief is starting to appear at the gas pump: the average price for regular unleaded was $3.42 per gallon , down eight cents in a week, and 24 cents in a month . Although there's a delay between the start of lower oil prices and lower prices at retail gas stations, motorists should continue to see falling gas prices, barring no major, new Middle East tension, or U.S. refinery problems.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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