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Oil Primed for Quick Climb, But Don't Fantasize About Return to 2008 Highs

Posted Feb 24, 2009 08:00am EST by Tech Ticker in Investing, Products and Trends, Commodities, Recession
Related: vlo, sun, OIH, XLE, XOM, CVX

If any market qualifies as rockier than equities, consider oil. Crude prices have done a complete roundtrip from $40 a barrel, up to $147/barrel last summer, only to tumble back down to today's levels under $40/barrel. So what exactly happened?

As our guest James Cordier, president of Liberty Trading Group, explains, oil's recent adventure was the result of a "perfect storm" of many factors.

  • Global demand was rising, along with hedge fund speculation.
  • The dollar was falling, boosting all dollar-denominated commodities.
  • China and other major oil consumers were providing fuel-price subsidies that propped up demand.

But by the summer of 2008, when those subsidies were removed and the global economy sputtered, oil's unraveling began. So is the oil party over? Not exactly. Once the economy begins its recovery, expect oil prices to race up to the $60-$70/barrel levels, Cordier forecasts.

And gasoline prices at the pump, heading into the crucial summer driving season? Higher, Cordier says. While demand may flatten as the economy slows and unemployment climbs, refiners are making less refined products such as gasoline and diesel to improve profit margins. We likely won't see prices topping $4/gallon like last summer, but hovering instead in the $2/gallon range. 

And the likelihood of a return to $147 oil? "A fantasy," Cordier says. 

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