No more easy long trades

For independent oil trader Jim Dietz, the palpable shift in the oil market's mood is a sign that oil's bull run, at least near-term, may be ending. Dietz said like housing, "oil has had an astounding bullish run," up more than 100% in three years. But unlike housing, no one to-date has argued that there is an abundance of oil supply on the market. However, that sentiment is shifting as economic data continues to point to a U.S. recession, and likely smaller increases in both crude oil and gasoline consumption.

"You can sense that the reckless bullishness is out of this market now. Trades have to much more carefully thought-out, and entry point is critical. You can't just go long at a less than ideal time and feel confident the market will rise eventually and erase your mistake," Dietz said. "That stage of the market appears to be over."

Watching gasoline consumption

Further, Dietz said if data in the weeks and months ahead confirms actual gasoline consumption declines, "that will take one of the demand fundamentals out of the oil market," the other being oil demand increases in Asia, principally China. So far, Chinese demand has not moderated. Further, Dietz also cautions that gasoline demand has not declined: nothing, it seems, not $3 per gallon at the pump, nor blizzards, nor increased traffic congestion, seems to be able to cut U.S. gasoline demand.

"But if lower gasoline demand ever did occur, that would be seismic in this market, and we would see a substantial drop in both gasoline and oil prices," Dietz said. Further, while underscoring that he believes those two fundamentals - - demand for oil in Asia and gasoline in the United States - - are the strongest variables in oil push to near-record highs, Dietz also believes that "there is a speculative element that has helped push prices higher." Those speculative longs, or "the specs," as traders like Dietz refer to them - - hedge funds, wealth funds, independent managers - - "would quickly exit this market, magnifying any price decline."

How much could oil's price decline? Dietz said it's nearly impossible to predict, due to the unknown regarding the U.S. economy, but he's sticking with his prediction that oil will moderate "to about $75-80 by the end of 2008."

Don't cry for me, Argentina

Still, Dietz said no one should fret about the impact of an oil price decline on the major integrated oil companies and on other oil producers.

"Rest assured, exploration budgets are safe because most oil projects are profitable with oil at $35-40 per barrel. And Saudi Arabia says it can pump oil profitably for about $5 or $6 per barrel," Dietz said. "So I think their margins are safe."