Existing home sales data and a speech in Kansas City by Federal Reserve Chairman Ben Bernanke are among the hot items people are paying close attention to Friday (August 21). Based on speculators driving oil to a new 2009 high above $74, it appears investors are operating with the assumption that the news should be positive for the economy.

Oil futures for October delivery touched a high at $74.05 early before dipping back below $74. Oil is on pace for more than a seven per cent gain this week, which has pushed crude to a level not seen since late October of 2008 when it settled at $75.22 per barrel. At that point, oil was tumbling down from its July 2008 all time high over $147 per barrel.

Despite that fact that oil has managed to remain in the $60-70 price range for several weeks, most top analysts continue to say that prices are more likely to drop during the rest of the year. Demand for fuel has not picked up; indicating higher oil is not based on typical supply and demand logic. In fact, new data showed that North American freight traffic dropped nearly 18 per cent in the week ended August 15th. This means that businesses still are not operating as many transports as they had been.

It has been clear for the last several months that much of the price movement in oil has been purely speculative as investors have become or active across the board since the initial signs and talk of economic recovery. On a daily basis, oil has tended to move in a fairly strong correlation with the equities exchanges.

A weaker dollar has also helped keep oil prices firm. Just a couple days ago, it appeared the Pound and Euro were losing steam after reaching new heights for the year against the greenback. However, the latest surge in oil has helped prop them back up. Assuming economists are correct that oil has limited upward potential in the near future, the dollar is a likely beneficiary when oil prices fall.

A new factor that may impact the price of oil is an expectation among many that tighter regulations are on the horizon for the energy markets. The Commodity Futures Trading Commission (CFTC) is expected to impose tighter position limits on “non-physical”, or financial investors in oil.

This move by the CFTC would be intended to help keep oil prices more in line with marketplace factors as opposed to speculation. If this restriction does go into effect, many expect immediate downward pressure on crude since current supply and demand suggests the need for lower prices.

Neil Kokemuller
9:47 AM EST
Friday, August 21, 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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