Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I'm Mike Norman, your host.

Today my guest is Fadel Gheit, managing director of Oil and Gas Research at Oppenheimer. Fadel, thanks very much for coming by; I really appreciate it.

You follow the oil markets and the energy markets obviously very, very closely. Let's talk about the period we're in right now. Obviously we saw a huge run-up in the first seven months of this year, culminating at almost $150 a barrel in mid-July. Now we've had a very big price decline, almost at 30%. What is behind it, in your opinion?

Fadel Gheit, managing director of Oil and Gas Research, Oppenheimer and Co. (Gheit): Well, to start with, the $148/barrel peak was an artificial peak because oil prices had been surging on really no changes in supply-and-demand fundamentals. They'd been driven by speculation, the fear of potential supply disruption and all these things. Nothing obviously happened; we had plenty of supply. Demand has been coming down in the U.S. and slowing down in China, India and elsewhere. So all of a sudden, the idea of oil shortages has not obviously panned out, and traders look the other way, and that's why the oil price is lower.

Norman: Let's talk a little bit about that speculation aspect. There were revelations recently that back in mid-July, just about the time of the price peak, the CFTC discovered a very large trader that had been misclassified as a hedging firm. The trader happened to be a commercial firm where their positions were enormous. They comprised or accounted for something like 30% of all the NYMEX open interests. Perhaps this was a trigger to the sell-off.

Gheit: That's part of it, and we've seen a lot of other hedge funds that were focused on commodities in general. One of them went out of business a couple of days ago, and there are rumors that there are more to follow. Basically these people were making huge bets, and it was fine as long as you are on the right side of the call, but then it hurts pretty badly if you are wrong, and they have been wrong.

Norman: They have been. Now, is the game over for these guys in the sense that there's too much scrutiny on them now? If they were a factor in the run-up to this $150/barrel peak - a huge number - are they out now for good, or are they out just because they've been scared out for the moment?

Gheit: They are only scared out for the moment. These people will always come back. This is like, you know, "I'm smarter than the other guy, he got caught, and I'm not going to get caught."

Guess what? You're going to get caught and somebody else will think that they're smarter than you are and will be trying the same thing again.

Commodities humble everybody, from the larger companies to oil-producing countries to everybody else. Nobody would contradict commodity prices worldwide. There are political factors obviously. There are so many moving parts that people can pontificate as if there were going to be $148/barrel oil by July 15 and then going to be $205/barrel oil by March 16. That's total nonsense.

Norman: Let's talk about regulation, because just prior to this discovery of this huge trader in there holding a very large position, Congress was discussing and there were a number of bills in Congress that were focused on dealing maybe with speculative position limits, etc. But nothing came of it. But some lawmakers said they're going to pick this up again now in September. Do you think anything will happen in terms of maybe putting some limits on it?

Gheit: I do believe that a new president in the White House, whether Democrat or Republican, is not going to put up with the nonsense that has been going on for the last five or six years.

Norman: Even if prices stay down?

Gheit: Even if prices stay down. I still believe that oil prices are inflated by as much as 50%. 50 percent of the oil price that you see right now is all fraud; it's not for real.

Norman: Wow. So the folks who say "Well, you know, speculation works both ways because now they're selling it," we shouldn't really be happy because it's still too high, right?

Gheit: I explain to people that you can have the same number of passengers that are in a boat, but if you go to one side of the boat, the boat will capsize, OK? And that's what happened. Speculators tend to basically amplify, whether they move up or they move down, and they are making a bet that's a self-fulfilling prophecy. At the end of the day, somebody will pay for it, and unfortunately the consumers will pay for it.

Norman: And they have been. All right folks, stay tuned next week for the second half of my interview with Fadel Gheit. We will be discussing the geopolitical outlook, and he'll be giving up a price forecast. Don't go away. This is Mike Norman and you're watching HardAssetsInvestor.com interview series.