The Rats are Back on the Ship

Oil's above $60 a barrel, gas is $2.50 a gallon. Not that this is something to complain about, but don't inventory stocks seem pretty healthy? Do you smell a rat? You've guessed right. Our recent relative spike is sponsored by the seem myopic bastards who brought last year's $100+ a barrel pain, our current financial distress. Looks like oil's recent rise is two-fold: Wall Street dipping its greasy hand in the oil cookie jar, and the "almighty" dollar taking a rest in the infirmary. There's been much discussion about this:

Here's one...

U.S. crude-oil inventories are at their highest levels in almost two decades, and demand has fallen to a 10-year low, but crude oil prices have climbed more than 70 percent since mid-January to a six-month high of $62.04 on Wednesday.

Meanwhile, although refiners are operating at less than 85 percent of capacity, which leaves them plenty of room to churn out more gasoline if demand rises during the summer driving season, the price of gasoline at the pump has climbed 28 cents a gallon from a month earlier to $2.33.

This time, Wall Street speculators — some of them recipients of billions of dollars in taxpayers' bailout money — may be to blame.

Big Wall Street banks such as Goldman Sachs & Co., Morgan Stanley and others are able to sidestep the regulations that limit investments in commodities such as oil, and they're investing on behalf of pension funds, endowments, hedge funds and other big institutional investors, in part as a hedge against rising inflation.

These investors now far outnumber big fuel consumers such as airlines and trucking companies, which try to protect themselves against price swings, and they're betting that the economy eventually will rebound, that the Obama administration's spending policies and Federal Reserve actions will trigger inflation — or both — and that oil prices will rise.

Here's a recent piece from Businessweek,

Here is the case for a price bubble: Oil inventories are at a 19-year high; the U.S. alone has some 1 billion barrels sitting in storage tanks, according to Mark Williams t the Associated Press. Demand for oil is set to fall to its lowest level in five years, says the U.S. Energy Information Administration.

The opposite case goes as follow: The market is factoring in expected inflation because of global deficit spending; Chinese investment spending is reviving. Over at Alaron, Phil Flynn says these are also genuine “fundamentals.”

Regardless, there always seems to be reason offered up to trust in a price run-up. After all, markets are all about emotions, as Robert Shiller notes. Yet, there are still sober voices. In my view, the Financial Times’ Chris Flood delivers it straight: Prices are rising because of various types of trading gambles. Flood quotes Mike Wittner, a senior oil analyst at Société Générale saying the following: “Recent price strength is not based on fundamentals, but on financial flows.”

Even the Drum foresees a price drop...

My analysis indicates that in recent months, as much as 2 -3 Mb/d of global petroleum supply has been used to build inventories. This is about to come to an end, because available storage is getting closer and closer to full and contango has begun to flatten. When additions to storage cease, the resulting drop in demand can be expected to lead to substantial downward pressure on oil prices.

It's one of those Kieth Olbermann "WTF!?" moments.

- Brewskie