When It Comes to Oil Prices, Demand Is the Key

To understand sliding crude oil prices, follow the demand trail.

While there is undoubtedly some risk to crude supply from potential U.S. action in the Middle East, OPEC appears ready to stand by current production levels, absent a large-scale regional conflict.

And while U.S. military response to the recent domestic terror may send crude prices higher, any rally -- as we have argued recently -- should be viewed as a chance to lighten up on energy, especially for shorter-term investors.

Why?

Before the Sept. 11 terror, the economy was already teetering close to recession and energy prices were beginning to feel the pinch. And with consumer discretionary spending hibernating after the attacks, there is little chance we can avoid additional economic contraction. That means an even further drop in energy demand. Plus, there's the direct impact of the air travel slowdown on energy demand, since nearly 10% of all crude demand is directly related to aircraft travel.

Concerns over an economic slowdown and the resulting decline in energy demand have energy investors anxious. "The crude markets are scared to death of a soft economy" says Dan Pickering, director of research at Simmons & Co., a Houston energy investment boutique. ...