Earlier today oil prices had traded higher, as traders were betting that this past weekend's wintry weather would put a crimp in heating oil supplies. Since then, though, oil prices since turned to the downside, dipping under the psychological $90 barrier.The main reason why oil prices have been falling today? You guessed it ... concerns over the health of the overall economy. Today's concerns are a runoff of last Friday's CPI report, which showed that inflation during the month of November was the highest that the economy had seen in the past two years. This sent the market tumbling to close out last week, and the bears have only continued to push down the market again today.
There has been a growing fear over the past year that the U.S. economy was moving full steam ahead towards a recession. The one thing that has provided some hope was the anticipation that the Federal Reserve would be willing to continue to slash interest rates in order to fuel economic activity and fight off any looming recession.
In fact, the Fed has provided some relief by cutting interest rates in its last three meetings, but with last Friday's inflation report, the question is now whether or not it can justify another rate cut in its next meeting.
Adding additional concern was a statement from former Fed Chief, Alan Greenspan, over this past weekend, indicating he was seeing early symptoms of stagflation. For those of you who are not sure what the exact characteristics of stagflation are, let me list a couple of them for you:
- rapid, out-of-control price inflation
- a slowing of economic growth
- rising unemployment
- leading to an eventual recession
When asked what he thought the chances were that America would actually enter into a recession, Greenspan stated that he thought that the chances were now increasing to around 50% that we will indeed hit the dreaded "r" word next year.
But let's get back to oil prices. Right now I would think that oil prices should stay pretty flat over the next month or two. We are going to continue to hear more and more news stories that discuss the weakening economy, while at the same time we will hear ever increasing reports that wintry weather is going to continue to increase demand for the oil ... so oil prices will basically just be stuck in the middle. Don't be surprised to see oil hovering right around $90 a barrel at least through January.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
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