With some modest signs of economic life and with a third consecutive day of stock gains that have pushed the Dow higher by over 600 points since Monday, crude oil prices are on the rise. Light sweet crude futures contracts for April delivery climbed $4.70 on Thursday to settle at $47.03 per barrel in New York trade.

Oil prices had dropped sharply Wednesday after data showed that US oil inventories are growing. The Organization of Petroleum Exporting Countries (OPEC) is also set to meet this weekend to discuss whether to cut output. Speculation Wednesday that the group of oil-producing countries would likely leave production at current rates also helped with Wednesday’s price drop.

As the OPEC meeting approaches, investors seem to be more strongly considering the possibility of a production cut. More importantly, though, oil traders appear to be buying into the same hope for the economy that stock traders have this week. Just as the oil decline was closely linked to the dramatic decline in the economy and stocks over the last several months of 2008, and the first few of 2009, its turnaround is likely to have a strong correlation as well.

Why would an economic turnaround lead to higher oil prices? Americans, who consume more oil than any other country, have been cutting use of gasoline and other petroleum-based products over the last year-plus in lieu of the recession. This huge drop off has contributed to the current price points in oil and gasoline.

Similarly, any sign of economic recovery brings with it speculation of greater demand in oil. Many businesses that have cutback might return to normal use of petroleum, and budget-strapped consumers may return to normal driving and use of natural gas in their homes.

Oil slipped to the low-$30 range for a while to start 2009, and it has hovered in the $40-plus range for the last few weeks. Forecasts prior to the start of the year called for a bottom of $25 and a high of $60-70 per barrel for 2009. The bottom may have already been reached, especially if the same is true of stocks. However, an economic turnaround of any significance would likely lead to a powerful rebound in stocks, and a similarly strong recovery in oil, based on the expected demand.

Gasoline prices that have settled under $2 per gallon for several months would also likely fall by the way side if an oil rebound takes place. Consumers could just as easily be staring $4 per gallon in the face again by the end of 2009. Considering the panic and fear in the current economy, though, the economic condition that would bring $4 gas would likely make the pump prices a bit more tolerable.

Neil Kokemuller
11:41 PM EST
Thursday, March 12, 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.
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