Posted November 16, 2007

There is so much “dumb” money in the oil market right now that unsophisticated traders could suddenly “panic,” sending the price down to $50 a barrel or lower.

That’s the expert opinion of Peter Fusaro, a noted observer of energy trading markets who publishes a directory of energy hedge funds.

In an interview, Fusaro emphasized that the oil market is still immature, characterized by a “vacuum of knowledge” even within major Wall Street institutions. Almost nobody does their homework, Fusaro added. Instead, a great many investors just follow the headlines and hope they will be lucky, which many have been recently as oil has climbed to close to $100 a barrel.

Adding to Fusaro’s belief that $50 oil could be right around the corner is the phenomenal amount of money that has recently flowed into energy trading markets. “Nobody knows how much money is in this sector, but we may have $12 to $20 trillion” invested in energy commodities, he said.

With so much money and so little knowledge, Fusaro says it’s easy to imagine investors stampeding for the exits if momentum starts pushing prices down. “I’ve seen estimates of $45 to $50 on the downside,” he said, adding that since energy commodities are traded electronically, the move down could be swift.

To be sure, Fusaro thinks market fundamentals likely would quickly reassert themselves, with prices going back up on growing indications of global oil demand starting to exceed available supply.

Whether or not oil prices plunge in the coming months, Fusaro says that in five years there could be $100 trillion invested in energy commodities, and thus the potential for wide price swings will be even greater.

Oil’s Next Big Move: The Unseen Reason Why $150 Oil May be Right around the Corner