After failing to cruise past the $80 level in recent weeks, crude oil has drifted lower toward the $70 mark. A report Wednesday (December 9) that indicated an unexpected drop in US crude supplies helped push the price of a barrel of crude oil back above $73 a barrel in early morning trade Wednesday. Still, oil remains relatively low in the near-term.

In the early hours of trade on the New York Mercantile Exchange, benchmark crude for January delivery was at $73.69. Tuesday, contracts settled at just $72.62 after a drop of $1.31 on the day.

The surprise fall in US crude inventory levels last week was reported by the American Petroleum Institute. According to the report, crude levels fell by 5.8 million barrels. According to the Platts survey of analysts, an increase of nearly 600,000 barrels in inventory was expected.

The Energy Information Administration delivers its report on crude levels later in the day Wednesday. Assuming its report confirms or backs up the API report, oil will probably surge even higher from current levels.

The medium to long term reality of oil prices is a topic of debate among analysts and economists. Some believe that market fundamentals are finally catching up to the price of oil now that it has settled into a comfortable price range. Others believe oil remains inflated compared to real-world business conditions based on the weak dollar and a correlation in oil speculation with equity trading.

The weaker dollar has long been a catalyst or oil speculation as many traders buy oil as a hedge against inflation. The weak dollar leads to speculation in variety of growth arenas. Oil has maintained a fairly consistent upward trend with equities this year, though oil has not been as strong as equities in the last few weeks.
The winter months are upon many parts of the US, which means demand for petroleum based products for home heating and transportation will be on the rise. Stronger than expected demand would likely continue to diminish crude supplies and send oil prices back toward $80.
However, if demand for oil remains modest in the coming months, oil could slide back, if some economists are correct that oil is inflated at the moment. A stronger dollar could help keep oil prices lower as well.

Neil Kokemuller
9:53 AM EST
Wednesday, December 9, 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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