Oil Prices Hit a 2009 High, but are Unlikely to Spike

Oil prices reached their highest level in a year today (Friday), as the dollar continued to weaken and stocks of gasoline unexpectedly fell. However, most analysts believe crude will avoid a volatile price spike, and either gradually proceed higher or regress in the short term.

Light, sweet crude for November delivery hit $78.55 a barrel on the New York Mercantile Exchange (NYMEX), their highest point since Oct. 14 of last year. However, analysts are divided on where it will go from there.

Optimism about the economic recovery, a rally in U.S. stock market, and a weak dollar have lifted oil prices from their February lows of about $32 a barrel.

Gasoline inventories fell by 5.2 million barrels in the week ended Oct. 9, the Energy Information Administration reported. That was a much bigger drop than analysts had expected, and coupled with a smaller-than-anticipated rise in crude inventories sent oil contracts soaring to a 52-week high.

However, inventories remain high and demand sluggish, which means, prices will likely hit a wall in the short term.

"There is more than adequate supply, more than adequate inventory and less than adequate demand to propel prices to this level," Edward L. Morse, head of research at New York-based brokerage firm Louis Capital Markets, told the Washington Post.

"Most of the price movement clearly stems from financial flows," he said, noting a spike in trading positions taken on the NYMEX and Intercontinental Exchange. "It will be interesting to see what happens if the assumptions on which rising prices have been based erode."

That is, speculators who are riding the wave of optimism that earlier this week carried the Dow Jones Industrial Average above 10,000 could be disappointed if the economic recovery loses momentum.

"The recent price rise has been very impressive and markets could well test $80 [a barrel] but in our opinion a correction next week is the likely scenario to back below 75 dollars and even to the low 70s given oil fundamentals remain poor, global inventories are still high and demand recovery is far from convincing," Sucden Financial Research analyst Nimit Khamar told the AFP.

News and Related Story Links:

• AFP:
  Oil prices slip after breaching $78

• Washington Post:
  Oil Prices Up, but Future Direction Is Murky