What it'll take to sink oil prices
Subprime woes, slowing economic growth, even a recession - will anything bring prices back down to $30 a barrel?
NEW YORK (CNNMoney.com) -- Could oil prices soon sink?
A strong economy equals strong demand, which equals higher prices.
So when stock markets tumbled earlier this week on fears that woes in the subprime housing lending sector could spread to the wider economy, oil prices followed stocks lower. Crude has lost some 6 percent over the last week, and at the $58 level is at the low end of its multi-week range.
And it hasn't been just subprime trouble sparking fears of an economic slowdown. Chinese markets - along with the rest of the world - dove earlier this month. Economic numbers of late have been shaky. Even Alan Greenspan has muttered the "R" word.
So are oil prices headed for a collapse?
"It is now looking like the day of reckoning may be sooner than we thought," Peter Beutel, an oil analyst at Cameron Hanover, wrote in a research note Wednesday. "If this is true, and equity prices continue falling, and then we have a recession, the impact on oil would be very bearish."
Beutel has long predicted that a global economic slowdown and new oil supplies coming to market will bring prices down significantly from current levels - like into the $30 range or perhaps even lower.
But his time frame for this to occur - which used to be a couple of years away - appears to be changing.
"The bottom line in the story is that a new trend lower in equities could be the signal for a recession to begin in the near future," he wrote Thursday.
Bears in the oil market are of course nothing new. But Beutel isn't alone in worrying about the economy - especially if the subprime lending mess takes out a big finance company or hits other sectors like consumer spending.
"Coming into the year we were pretty positive on the economy, but with this subprime thing we're kind of taking a wait-and-see approach," said Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors. "Will this be just a slowdown or a recession? The jury is still out."
The subprime mortgage sector, which makes home loans to people with less than stellar credit, has been stung recently as defaults on mortgages climb.
Dozens of smaller subprime lenders have gone bankrupt and the No. 2 lender in the field, New Century Financial, has been cut off from financing by its own lenders and had its shares delisted by the NYSE.
There is a fear that as the market cuts off financing available through these loans, home prices and the U.S. economy as a whole could be hurt.
And many major Wall Street firms have yet-undetermined exposure to the bad loans.
Even with a recession, which Hicks said he still is not forecasting, he said OPEC cuts and demand from developing countries would probably keep oil prices in the low $40s, still four times higher than lows hit in the late 1990s.
And then there are the bulls.
"You're talking about two pretty big ifs," said Paul Horsnell, head of commodities research at Barclays Capital in London, referring to the subprime woes expanding and that sparking a recession. And even if that happened, "$40 is far too low a number."
Horsnell said even a recession might not bring prices down.
He said there are several other factors influencing oil prices - from growing demand in developing countries to OPEC to geopolitical tensions.
"Everything else being equal, [recession] is a downward factor," he said "But everything else is never equal."