This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Oil Prices May Rally on a U.S. Default

A U.S. default or credit downgrade may cause oil prices to rally or sink depending on which facet and drivers of the oil markets the analyst focuses on more. But Citi Futures Perspective energy analyst Tim Evans takes a look at another oil market driver possibility: deep spending cuts.

He says that even if there weren't a U.S. downgrade or default -- even if U.S. lawmakers on all sides came to an agreement on deep spending cuts that would bring down overall debt in the long-term -- oil prices could drop.

"I'm more concerned that U.S. [oil] demand will fall short of expectations. Cutting spending -- whether its government, business, or consumers doing the cutting -- is a reduction in aggregate demand," said Evans. "Spending cuts would be a drag on the economy for years to come" with a serious risk that businesses won't pick up the spending slack from government cuts.

The United Kingdom, he said, is a good example of what he's worried about. "Britain adopted austerity measures a year ago and they just posted a 0.2% GDP [gross domestic product] gain for Q2 [second quarter]. Too much budget-balancing too soon could create a repeat of the 1937 U.S. recession he said.

Kinker of Mirus Futures meanwhile believes that the Federal Reserve is unlikely to implement another round of quantitative easing, given the widespread questions about the effectiveness of the previous rounds of stimulus programs, and will likely use a tool "that they never used before" to lift the economy.

As the Aug. 2 deadline for raising the U.S. debt ceiling approaches, "the pressure [on oil prices] will continue to ratchet up," said Smith of Summit Energy, noting that he expects to see a selloff in crude under the influence of a general flight from risk if a compromise for raising the debt ceiling by Aug. 2 isn't reached -- though the move lower would likely be tempered by weakness in the dollar. Smith believes the next test to the downside would be $94 for West Texas Intermediate light sweet crude oil and around $110 for Brent crude oil.

Evans of Citi Futures Perspective said even without a default, spending cuts or economic slowing, the Brent market is overvalued by about $20 to $25 a barrel, so Brent could fall by an amount similar to its drop in 2008 to $80 to $85 a barrel level when a bearish economic scenario is added in.

Oil Price Information Service's chief oil analyst Tom Kloza said if the debt ceiling wasn't an issue, he'd expect that oil prices would be headed for more modest levels in the August to September period, then begin a climb towards "the highest prices of our lifetime" as more investment and speculative money flows into oil between the fourth quarter of 2011 and first quarter of 2012 -- based a pattern that becomes more pronounced year after year -- and the Arab revolutions and emerging market demand lift prices.

Oil and gas stocks settled lower Wednesday on U.S. debt ceiling concerns and mixed earnings reception.

Chesapeake Energy (CHK) fell 2.1% to close at $33.40, Range Resources (RRC) inched 0.5% lower to $64.30, EOG Resources (EOG) tumbled 2.4% to $104.07, Forest Oil (FST) lost 2.8% to $25.69, Carrizo Oil & Gas (CRZO) surrendered 3.5% to $38.71, Occidental Petroleum (OXY) tumbled 3.3% to $101.40 and Double Eagle Petroleum (DBLE) was lower by 0.7% to $10.70.

-- Written by Andrea Tse in New York.



>To contact the writer of this article, click here: Andrea Tse.

Readers Also Like:


Stock quotes in this article: CHK, RRC, EOG, FST, CRZO, OXY, DBLE 
Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,365.83 +103.27 0.64%
S&P 500 1,855.90 +12.92 0.70%
NASDAQ 4,070.9150 +36.7540 0.91%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs