Regardless of what many economists and analysts have said about the supply and demand reality of oil, the price of a barrel continues to hover around and just over the $70 mark. In noon time European trade on the New York Mercantile Exchange Wednesday (October 7th), benchmark crude for November delivery trades at $71.20, after settling at $70.88 on Tuesday.

Based on the fact that demand for oil and fuel have not grown tremendously in recent months, and with crude inventory levels remaining at historic highs, it is hard to believe that oil continues to hang out at the $70 level.

Similar to other speculative products, the price of oil has been mainly driven by economic indicators and the dollar over the last several weeks and months. As top economists and investors grow more confident in the US economy, oil stays firm, but any data or signal that concerns people results in a dip of some sort.

Oil has not always traded in such strong correlation with stocks, but too many, demand for fuel and oil-based products are indicative of underlying business and consumer confidence in the economy.

As consumers gain more confidence, they are likely to travel more and use more fuel. Businesses that continue to cut jobs (see the 9.7 per cent unemployment) are often still restricting or consolidating travel and transportation.

It will be interesting to see at what point the connection between equities and oil dissipates. Given that the correlation has evolved during the slumping economy and has maintained as hopes of an economic rebound pick up, it is sensible to believe that oil speculation might go its separate way after things have stabilized?

So what is oil worth once it is priced based on its own merits? This is a hard question to answer. Many experts have commented that the climb from the low range of $30 to the current $70 level has been purely speculative, since there have been no changes in supply and demand that would favor higher prices. This suggests a likelihood that once the US economy and dollar firm up, oil should retreat to a more natural level.

However, when oil went in the proverbial tank, dropping from $147 to that $30 level in a matter of a few months in the latter half of 2008, it did so mainly because of recessionary fear and a fall off for big oil. Perhaps the current level is the “real” market value of oil and this is where crude will remain until changing supply and demand factors move it one way or the other.

Neil Kokemuller
9:18 AM EST
Wednesday, October 7, 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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