Where Do Oil Prices Go From Here.

Crude oil prices have hit another record high on Friday, trading at almost $126 a barrel. Anticipating increased demand during the American driving season, and tight supplies, crude reached $125.98 a barrel in European trade this afternoon. What is most surprising is that oil prices go up even on days when the US dollar gains versus other currencies and irrespective of whether US weekly inventories show a build up. What's more US refinery capacity utilization has fallen to 85.4% this year from 87.6% last year. Although most of it is due to regular 'spring maintenance', refiners say that part of it is due to falling demand for gasoline and heating oil.The latest trade figures released today seem to confirm this as they show that the US foreign oil bill fell by 5.9% for the month of March this year.

Many experts would have us believe that pries are increasing simply because supply is unable to keep pace with demand. They explain that unlike the energy crises of the 1970's and 80's which were caused by supply disruptions, the present crisis is led by a surge in demand. World demand, they argue, is increasing, and any minor fall in US demand is more than offset by rising demand in China, India, and the Middle East. They point out that non-OPEC supply has fallen below expectations, primarily because of a fall in Russian output. They go on to warn that without any meaningful additions to production capacity somewhere in the world, or without development of viable alternative energy sources, oil prices are not going to decline.

But there is a growing number of analysts who don't buy the above argument. They are convinced that oil is now trading 'ex-fundamentals.' So what is really going on? They say that oil is now in a ridiculous bubble. They pin the blame for the present rise on the prediction by Goldman Sachs that oil will hit $200 a barrel in a couple of years.This is conceded by many traders in the Nymex pit. Speculative momentum has built up in oil futures to such an extent that computerized buying kicks in on every dip in prices.Investors today seem to feel more comfortable holding oil futures rather than holding financial instruments, real estate or even the US dollar.They have lost faith in both the US economy as well as the US dollar. The state of the US economy is a subject of daily discussion. As far as the dollar is concerned , it has lost almost 84% in value against the euro since 2000! Bush's economic policies and the Iraq war are finally beginning to take their toll. Nevertheless these factors alone cannot explain the extent and the speed of the rise in oil prices. Oil was trading at about $25 a barrel shortly before the US invasion of Iraq in March 2003. Even last year in April it was around $70 a barrel. The extent and speed of the price increase, without an apparent change in fundamentals, has taken everyone by surprise.

It is this behavior of oil prices which raises the suspicion that powerful cartels are manipulating oil prices in much the same way as companies such as Bear Stearns and others manipulated the financial markets across the world. Most experts predict that this bubble will also burst like all bubbles do, and oil prices will finally settle well below $100 a barrel.