NEW YORK (TheStreet) -- Oil prices have continued to plunge in the last week, for a moment even touching $75 a barrel. While it is not clear to me how low oil prices could go, it's becoming more likely that prices will remain under $85 for a relatively long time.
This prediction of the longevity of what I'm calling the "$80 winter" is based on what I know about the financial inputs into the oil market, a factor ignored by most other energy analysts.
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I believe that understanding the financial inputs into price are often much more important than parsing the fundamentals of supply and demand. I like to look at the trades that are being made in the oil markets and the people that are making them, while others like to speculate on what the Saudi oil minister is thinking. But in the end, prices are directly driven higher when buyers outnumber sellers and driven lower when those buyers disappear.
Two very important financial factors have convinced me that the sellers will outnumber the buyers for quite a while. First is the state of the speculative trade. Oil has floated on a pillow of speculative bets for the last decade, a thesis I wrote a book on in 2011 called Oil's Endless Bid. While not a perfect barometer of the extent of those bets, the Commodities Futures Trading Commission (CFTC) tries to keep records of how many participants in financial oil trading are merely speculators and records these numbers in their bi-weekly Commitment of Traders report (COT).Oil's rapid decline has been accompanied by a massive outflow of speculative positions; both individuals and hedge funds have been abandoning their "long" bets on oil and now long speculative positions are at their lowest level in almost two years.
Historically, it has taken a long time for speculative money that has been forced out of the oil market to again find its "courage"; 2008 would be the sharpest example of that as oil retreated from $147 to $35 a barrel and took more than two years to regain $80. While this drop in oil prices is not as deep as the massive 70% loss recorded in 2008, we still shouldn't expect a strong oil rally any time soon.