Will Price of Oil Fall?

Readers Question: how could oil price possibly down? any supported theory?

Oil prices could fall if:

Supply Increases by more than expected.

For example, maybe a country like Iraq or Iran has an unexpectedly large reserve of oil that they could easily start producing. This increase in supply would cause prices to fall. Note: it is notoriously difficult to predict how much oil is available, and some do say that Iraq has a lot of untapped supply.

Market Sentiment Changes

Not all movements in the oil price is due to basic supply and demand, there is also a speculative element to the rising price of oil. People are buying oil futures and oil stocks because they expect prices to keep rising; this speculative demand is causing prices to rise by more than is justified by economic fundamentals. If people feel that oil price has peaked (at least for short term) speculative buyers will sell causing prices to fall.

Global Recession

At the moment, the main reason for rising oil prices is the increased demand for oil, particularly from countries like China and India. However, if there was a global downturn then demand would slacken off and prices could fall. A recession in just the US may not be enough; it may require a downturn in China.

Alternatives to Oil

Another factor that could cause price of oil to fall is if a realistic alternative to oil was found. For example, if hydrogen cars became cheaper than petrol cars. This might not happen overnight, but over time demand for oil could fall as people switch to alternatives. This would eventually cause prices to fall.