Last November, during the annual OPEC's summit in Vienna, cartel members admitted that they could not control crude oil prices, as the market had been surrendered to speculators. It was a painful, but very honest, conclusion from the, once upon a time, absolut dominant of the world's oil market. At the good old days, the corellation of demand and supply and the growth rate of world economy used to determine prices. But nowadays, that seems to have changed, as crude oil has been trasformed from a typical raw material to an investment tool. At the same time, the dollar's depreciation seems to be the best ally for the investors' shift to crude oil. In recent months, heavy trading in futures contracts have pushed oil prices to historicaly high levels above $100 per barrel, well beyond what would be typically expected based on current demand levels. That happened at a time when the U.S economy layed on the verge of recession and without any special political tension in the Middle East or the Persian Gulf.
Last December, Turkey's invasion in North Iraqi territory to fight Kurd rebels, was only an excuse for speculators. As analysts say "investors look at oil as a pretty safe destination. They're buying up all these futures contracts. That's putting a lot of pressure on prices".
Investors have turned to crude oil for profit potential in the wake of a stock market and debt investments turmoil during the past six months. Typically, demand for oil slows down in the United States this time of year as the heating season ends and many power plants and refineries go offline for maintenance work. But this, will not happen this year, as prices remain above $100 per barrel. The most optimistic scenario is that in the coming weeks prices will soften before they start to rise again in the summer. As the summer season is upon us, the world demand for gasoline increases due to consumers' traveling in the summer time, causing a surge in crude oil prices.
This, will give hawkish investors the opportunity to retain prices in high levels, as nobody else can control the market. The heavy trading of futures contracts for crude oil delivery helped push prices for a barrel of oil to the $100 range in January, roughly twice the price for crude futures at the same time a year ago.
As dollar remains weak, oil prices will be looking to break one record after another. It's what we saw the last three months in the markets. Since crude oil is usually known as a hedge against the falling dollar and inflation, it rallied as the greenback lost its grounds. Also when the US dollar is weak it attracts foreign investors because they hold a stronger currency.
Some experts also say the federal government is partly to blame for not releasing some oil that has been stockpiled in the Strategic Petroleum Reserve. The federally maintained oil storage system holds more than 700 million barrels worth of oil for a future emergency.
Normally, when prices climb so quickly, Saudi Arabia or another member of OPEC can open the spigot on oil production and flood the world market. But OPEC's excess capacity has shrunk considerably in recent years, amid soaring demand in developing countries such as China and India. Meanwhile, production levels among non-OPEC countries hasn't grown as quickly as expected, "In a lot of ways, this is really a new market for us, We've had several years of very strong growth. That's eaten up the excess capacity we used to have. If something goes wrong, there won't be a safety margin." says an analyst in New York' Commodities Exchange to Bloomberg.
The answer to the question of how long oil prices will remain to current levels is simple; until dollar strengthens against all major currencies, making crude oil market less attractive for traders seeking a hedge against inflation and a falling U.S. currency.
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