Where is the price of crude oil headed?

The price of crude oil has risen above $60 again, and even popped above $61. Traders and short-term speculators may try to push it a bit higher, but there may be significant technical resistance around $62.50.

Oil is once again being driven primarily by massive speculation, far out of line with actual physical demand or supplies. This simply illustrates the extent to which there is a massive excess of money sloshing around in the financial system, unable to find a productive home.

I continue to believe that crude will eventually retreat and fall back under $50, but trying to predict the short-term behavior of speculators when such massive liquidity is in play is an exercise in futility.

Even though energy price changes are not considered to be a component of "core" inflation, the reason for this is that normally non-core price volatility tends to dissipate fairly quickly after it accumulates, usually within a few months or a year at worst. But in the current episode, a massive speculative commodities bubble, core inflation is probably a full percent higher than where it would probably be ex the commodities bubble. The big ise from the $20's to the $50's and beyond that occurred over the past three years is gradually spilling over into the rest of the economy. Normally, the Fed pays little attention to that non-core volatility, but you have to believe that the Fed is more than a little concerned about the persistance of high commodities prices.

While it is true that energy is a smaller component of economic activity that a few decades ago, you also have to take note of the fact that energy prices are probably more than double what they would be ex the speculative bubble. Normal economic signals become quite distorted in the presence of such abnormal stimulus.

Part of the persistence of high energy prices is due to no shortage of investors who have been mislead to believe that energy commodities are a long-term investment rather than simply what they are: commodities. Not only are speculators trading in energy futurs contracts, but over the past two years they have been taking physical delivery of the commodities themselves (not delivery to their offices, but electronically they are now the owners of commodities in storage.) Ultimately, this amounts to raw, naked market manipulation, the process of artificially taking supplies off the market by financial players rather than true end users of the commodities. There is nothing illegal there, per se, but it does cause prices to stay artificially higher than true supply and real demand would suggest, and does mean that energy commodities will come tumbling down as these so-called investors begin to lose patience with the fact that they are not getting the kind of dramatic returns that they secured over the past two or three years.

Near term, expect a lot of volatility. And expect a lot of "stories" that are used to promote higher energy prices, or more specifically to promote more speculation.

It will be interesting to see if short-term players can manage to push oil above $62.50 this week. If not, these same short-term players will likely reverse and start playing oil on the short side.

In summary, crude oil continues to be a speculation and trading game, quite divorced from economic fundamentals.

-- Jack Krupansky