Crude oil prices rose to their highest level in six months on Wednesday as traders latched on to hopes that the global economy is recovering. WTI Cushing, the US crude benchmark, touched $60.08 before falling back slightly, amid a growing feeling that “we’ve seen the worst of it, and the only way now is up”, said Gerard Rigby, an energy analyst with Fuel First Consulting.
But this new bullishness “doesn’t make sense”, said Edward Morse, chief economist at LCM Commodities, who was one of the few analysts to call the peak of the bubble last year. The fundamentals are very poor. US crude inventories are now at their highest in 19 years, global oil demand has fallen by 400,000 barrels a day and there is an estimated 100 million barrels lying offshore on oil tankers, according to consultants JBC Energy.
Hedging against inflation
Instead, “recent price strength is not based on fundamentals, but on financial flows”, said Mike Wittner, an oil analyst at Société Générale in the FT. Looking for a hedge against inflation driven by government money-printing, investors have started pumping money into oil, said Steven Mufson in The Washington Post. They’ve also targeted natural gas, which has climbed 39% since late April despite a massive supply glut. So energy prices have gone up, even though oil demand is set to fall to its lowest level in five years, according to the US Energy Information Administration (EIA).
Around three million barrels of recent supply has been bought to build inventories, said Rune Likvern on TheOilDrum.com. But with storage almost full, these purchases, which have buoyed prices, will stop. After that, prices could fall. The EIA has a price range of $55-$58 for the second half of 2009.