Where is crude oil headed now?

Although crude oil had briefly poked below $50, it popped back up to $55, and now the trend is even murkier. A lot of the movement (volatility) is simply "technical" trading and short-term positioning by speculators. It could take a few months before we see the price of crude settle into something resembling equilibrium. As I stated two weeks ago, I see crude in a wide range of $45 to $60 for the foreseeable future. Plenty of volatility.

I read that the Saudis would like to see oil at $50. Maybe that is true.

I did notice that there has been a modest bit of renewed speculation in crude oil futures. I say this because the duration curve for crude oil futures had recently returned to being purely in contango with prices rising for each monthly futures contract all the way out to the longest dated contract, suggesting an exodus of many speculators, but this past week we saw a return to a split curve with contango (rising prices) out to June 2009, but then prices went into backwardation (declining) all the way out to December 2012. To be sure, the duration curve is in a state of flux and it may take anther month for it to settle into a clear trend. Speculators are truly conflicted about whether to stay in oil or bail out and move on.

Speculators will bounce in and out of the crude oil futures market for the foreseeable future until prices decline to a level where even the hardest core commodities bulls pull out. Sure, there will always be short-term traders to push oil up and down a couple of bucks, but it is the massive wave of speculators such as hedge funds and investment banks that are keeping oil up at $55 rather than letting real supply and real demand let it fall back into the $20's.

-- Jack Krupansky