July crude oil traded up $1.35 on Thursday (June 11) to settle at $72.68 per barrel, after reaching as high as $73.23 during the New York trading day. The leading catalyst for the jump was the latest jobless claims report that shows that first time jobless claims dropped, a sign that perhaps the worst of the unemployment conditions has been seen.

Ironically, another data report showing May retail sales grew, the first growth in three months, contributed to the gains. The irony stems from the reality that much of the increase in retail sales was attributed to the climb in gasoline prices that have produced more revenue for gas retailers.

Many analysts have expressed their bewilderment over the growing prices in oil and gas. Most pre-2009 forecasts said the $75-80 range would be tops for oil this year. Some still say they believe $40 is a more likely closing point for the year than $80, based on supply and demand indicators.

Pure speculation has caused oil to increase by around $40 from its lows in the low-$30 range from earlier in the year. The Paris-based International Energy Agency announced that it was revising its forecast for this year’s global oil demand upward. This also helped with Thursday’s gains. The IEA now believes demand will fall 2.9 per cent to 83.3 million barrels per day, as opposed to previous forecasts of a 3 per cent drop.

Perhaps the strongest overall contributor to the current oil price is a weaker dollar. Most of the moves made by the US government to help stimulate the economy have created a perception of a weaker near-term future for the greenback. Speculation in commodities or safer investments like oil and gold increases when investors opt to trade in their cash for other opportunities.

According to AAA, the national average retail gas price was $2.632 per gallon overnight. This is up 38.4 cents per gallon over last month. Naturally, higher oil prices and the weaker dollar are pulling up the cost of prices at the pump. At this point, the Administration and the Fed are likely willing to deal with higher fuel prices as a result of sparking struggling sectors of the economy.

Oil will probably remain near current price levels for the short-term because it is unlikely the Fed will raise interest rates soon. Higher rates make the dollar a more attractive investment holding. Demand for oil and gas will probably take a while to pick up steam until the unemployed are able to find work, and businesses are ready to expand. Whatever demand increases expected for 2009 have likely been accounted for in the current speculative environment.

Significant price volatility took on a whole new meaning last year when oil dropped from a mid-summer high over $147 to just $33 per barrel by year’s end. There is no question that a firmer dollar, combined with historically high inventory supplies and diminished global demand, could lead to a sharp drop in oil in the next six months.

Neil Kokemuller
11:41 PM EST
Thursday, June 11, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices .

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