Is the 3 year uptrend of oil prices decisively broken? The stock market seems to think so, but this thinking is rather short term.

The risk premium in oil prices currently is shrinking not because the world necessarily is a safer place. Global terror still could disrupt supply. The risk premium is shrinking because hurricane season came and went without last years' major disasters.

Current supply less demand is not great. If the many new oil projects that have been started deliver additional supply, supply could grow faster than demand -- but that would take place only if world economic growth moderated, not something that is likely with China and India still booming. Moreover, the likelihood that supply will grow faster than demand is not great because of the drying up of old oil fields and the limited ability of Saudi Arabia to immediately boost production.

The marginal costs of added tar sands, deep deep-water wells, and Venezuela's heavy oil are high. If full environmental impacts are captured, the costs would be higher still, but full environmental costs are never captured.

It could also turn out that expected new sources of supply disappoint and/or old wells decline more rapidly than optimists hope. What we might witness is not that oil prices will continue to drop but that oil prices will continue to be volatile. The range may be between a low of perhaps $40-50/bll and a high of $80 to 90/bll. The high range could be reached or exceeded if any number of political or terrorist inspired events transpire. The risk of supply disruptions from a global event or events keeps a floor on prices.

The bottom line is -- don't bet on a continued and sustained drop in oil prices.

More commentary on US Oil ETF (NYSEARCA:USO) here.