MW: Oil's moves leave traders scratching their heads
By Myra P. Saefong, MarketWatch
TOKYO (MarketWatch) -- The price of crude-oil futures has jumped more than 70% in the past year and that's left quite a few traders scratching their heads.
After all, at more than 356 million barrels, U.S. commercial crude-oil inventories are "above the upper limit of the average range for this time of year," according to a report from the Energy Department.
In fact, "petroleum stocks of crude oil, gasoline, jet fuel and distillates are all above the high end of the normal range," said James Williams, an energy economist at WTRG Economics.
"U.S. crude-oil stocks have risen for 11 consecutive weeks," and the Organization of the Petroleum Exporting Countries has "plenty of spare production capacity," he said.
Yet prices for crude oil are trading near $86 per barrel on the New York Mercantile Exchange, up from around $49 a year ago -- and over 20% higher than the nearly $70 price at which they traded just six months ago.
U.S. crude supplies haven't climbed above 355 million barrels since June of last year, and at the time, crude prices stood at $72, according to Justin McNichols, a managing director at Osborne Partners Capital Management in San Francisco.
"The price of oil seems to reflect an optimism in economic growth by traders that is not shared by Main Street or evident in the statistics," Williams said.
Tom Kloza, chief oil analyst at the Oil Price Information Service (OPIS), said most of the gains in 2010 have been "thanks to financial money managers embracing crude oil as an asset class and embracing the notion of [West Texas Intermediate crude] or Brent as a proxy for global economic growth."
"The fundamentals are less compelling," he said.
So "oil's recent jump above the $80 level is predicated more on a general belief in the overall global economic rebound than it is directly related to any supply/demand issues," said Neal Ryan, a managing partner at Ryan Oil & Gas Partners LLC.
Logic prevails
Given all that, some traders may cringe at the somewhat irrational moves in crude prices lately and maybe even start to shy away from investment in the market.
But there are lots of good reasons why oil prices can continue their climb even from these lofty levels.
Prices have climbed against a backdrop of a "dramatically improved" global economic outlook from a year ago, continued sustained growth in China, the inventory "restocking theme" in the U.S., the overall move toward risk trades, and the fairly low inventories of finished gasoline, said McNichols.
Patrick Kerr, managing director at Amerifutures Commodities & Options, said the oil market's also experienced "documented evidence of substantial depleting " at the world's major oil fields, rising tension in key oil-producing regions such as the Middle East and Venezuela, a lack of substantial alternatives and the diversification out of fiat currencies into hard assets.
