Now that oil is down 25% off its peak, people are asking why are prices falling, and so fast?

As crude oil was pushing towards its July 11 all-time high of $147.27, everyone was trying to figure out why prices were rising so relentlessly. The three most commonly cited reasons were: a) increasing worldwide demand, b) fears of shortages, and c) blatant market speculation.

Well, now that oil has taken a 25% dive off that peak (in less than a month!), people are asking – why is the price falling, and so fast? And that’s a very good question. Did the global demand for oil suddenly take a u-turn? Is the world no longer facing oil shortages? Is there peace in the Middle East? Have speculators shifted their attention to other markets?

From an Elliott wave perspective, these are simply the wrong questions to ask. Financial markets – including oil prices – move to the beat of their own drum; once a trend gets going, “news and views” matter little. How else do you explain the fact that when Russia invaded Georgia on August 8, threatening the safety of the major Baku-Tbilisi-Ceyhan (BTC) oil pipeline, the market barely noticed it?

As the editor of EWI’s Short Term Update observed on August 11, “…if there ever was a fundamental ‘reason’ for oil to shoot higher, it is Russia’s invasion of Georgia. I believe that they even shut down a pipeline. When psychology reaches an extreme and the trend turns, all the supposed reasons pundits cited as to why prices were rising matter little. Nearly all were rationalizations to begin with…” Well put.

So, what IS going on with oil? When you are tackling big questions, it pays to step back and look at the big picture. So, how about a look at oil prices from 1859? Back in January, Steven Craig, editor of EWI’s Energy Specialty Service, recorded a regular video update for his subscribers.

In that January 16, 2008, video, Steve presented three long-term Elliott wave counts for oil: The first was his preferred count (i.e., one with the most evidence behind it at the time) calling for a rally in oil towards $150, and two alternate wave counts (i.e., less likely ones). Watch Steve as he makes a case for the big picture in oil now (4 mins.):

Video: Oil — The BIG Picture (Released January 16, 2008)

Need to know what’s next for crude? Try EWI’s Energy Specialty Service.

Elliott Wave International