Crude Oil Prices Continue to Buck Market Trends

Traders on the floor of the New York Mercantile Exchange (NYMEX) (image:msnbcmedia4.msn.com)

The price of crude oil rose for the third straight day today, topping the fifty dollar a barrel mark, after falling to $45.88 on Monday. Now at $51.25 on the New York Mercantile Exchange, oil’s resilience in the face of the general economic woe comes as a surprise to many analysts. It wasn’t long ago that those same analysts were predicting that oil could go down to twenty dollars a barrel or even less. So, with demand way down – the lowest in a decade in the US — and inventories at historically high levels, why is oil still relatively expensive?

In an article in Thursday’s New York Times, reporter Jad Mouwad wrote that “oil is once again being sought by investors as a refuge against a slumping dollar and rising inflation.” Those are the same investors who helped drive oil to a high of more than $140 dollars a barrel last summer. When they were routed by the financial crisis they deserted oil and the price was down to $33 a barrel by December. The economic picture hasn’t improved much since then, but investors seem to be returning to oil for several reasons.

The Associated Press said on Friday, “With concern rising that the U.S. bank bailout will spark a wave of inflation, money is flowing into hard assets like oil. And almost all longtime traders will say it is only a matter of time before crude rebounds sharply.” When that may happen is anyone’s guess, but sitting on oil until the price goes up is expensive in itself. The AP article points out that when inventory levels are high, storage rates go up and prices go down, but “crude prices appear to be defying the norm.”

The article quotes Andrew Lebow, senior vice president and broker at MF Global, as saying. “It’s surprised a lot of people that oil is hanging around $50 and not $40″ a barrel.” Other players are expressing surprise at oil’s strength in the face of the troubled world economy. U.S. petroleum demand is the lowest in a decade while inventories are showing the biggest surplus in nearly 20 years. That usually means lower prices.

Trader and analyst Stephen Shorck told the AP, “We do not have a thoughtful explanation as to why crude oil moved higher other than, there were more buyers than sellers.”

But although demand is down, supply is too. OPEC has cut crude supplies by several million barrels per day and is contemplating yet further cuts. The Times article quotes Roger Diwan, a managing director at PFC Energy, a consulting firm, as saying “Investors have come back, yes, but not in a huge way,” said “One of the main reasons that oil is at $50 is that you had a sharp curtailing of supply.

Oil demand is expected to continue to drop this year. According to the Times, “the International Energy Agency, an adviser to industrialized nations, expects oil consumption to fall 2.4 million barrels a day this year, or 2.8 percent, to 83.4 million barrels a day, the steepest decline since the early 1980s. Prices could yet fall if the economy weakens further or if the stimulus measures adopted by the United States and other nations fail to take hold.