How low can oil prices go from here?

But while new discoveries are being made, much of the world’s oil today is produced in regions roiled by political and economic instability. Militants in Nigeria continue to attack pipelines; Iran and Venezuela have made vague threats about withholding oil; Iraqi oil output remains vulnerable to ongoing violence there. Though the oil markets have factored in some of that risk, the ongoing threat of a cut-off in supply will keep oil traders nervous, according to Craig Smith, CEO of Swiss America Trading Corporation

“I'm not suggesting we're going to see $78 barrel oil tomorrow,” he said. “But I wouldn't get too overly optimistic until we see some of these very, very critical issues that could affect supply get past us. Until that happens, I think we should have a little bit of guarded optimism here."

What will OPEC do?

Oil inventories have tightened a bit in the past two months, largely due to production cuts from OPEC suppliers in the last few months. That may begin to slow — or even reverse — the recent price slide. And if prices fall further, the cartel could decide to take even more oil off the market to prevent a deeper slide in crude prices.

But OPEC has a history of agreeing to production targets that its members don’t abide by, especially those that rely most heavily on oil to pay the bills. Though OPEC producers need to keep a lid on supplies, prices at current levels are still high enough to spare them serious financial pain, according to Robert Johnson, director of energy and natural resources at the Eurasia Group.

“Most of the OPEC members have their national budgets based on oil prices that are well below where various benchmarks crudes are now,” he said. “So they feel like there is some time before they feel additional pain that could cause them to take action.

Then there’s the wild card of speculation in the oil markets, which became a big source of trading profits in 2006. The summer’s run-up in price was helped by huge inflows of cash from hedge funds and other investors betting that prices would continue to rise. When prices peaked, much of that cash began to flow back out of the market, accelerating the decline.

Now, the latest slide in prices has also been accelerated by investors selling short, betting prices will go lower. But while these investment flows may amplify the market’s moves, the impact is only temporary, according to Kingston.

“In the long run speculative money can not for any length period of time move a market higher or lower than it would be that it would be otherwise,” he said. “In a short period no doubt about it over time, supply and demand fundamentals have to rule.”

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