Oil heads toward $60 on economic recovery talk

By all rights, the price of oil should be declining right now. Oil inventories are above three-year levels. Land-based storage tanks are getting so full that oil producers are storing oil on tankers at sea.

And yet, the price of oil is rising, hitting $58.57 per barrel, up $2.02 Thursday, its highest level since November 2008. What gives?

The mind-set of oil traders, that's what.

Sentiment is building in oil markets that both the U.S. and global recessions are bottoming -- a fact that would increase oil demand months out. Thus, traders are positioning themselves in anticipation of that demand increase, leading to higher prices.

Unleaded gasoline also jumped 5 cents to $1.68 per gallon Thursday at mid-day on the sentiment.

Oil has risen about 19 percent in the past two weeks, and it's really hurt the oil bears. Energy Trader Jim Dietz is one: he's short oil, with numerous monthly contracts.

"Every inventory and demand indicator points to an oil price retreat," Dietz said. "So far, it isn't happening. Dietz obviously has buy/stop losses in for all contracts, however he can't reveal their levels, for proprietary reasons. He would only characterize his losses so far as, "A significant figure, let's put it that way. It's a significant figure. My wife won't be happy, let's put it that way."

Dietz's to-date paper losses underscore the complexity and high risk involved in trading oil futures. Even the most talented, experienced, professional oil traders with the most sophisticated support systems and ample liquidity can incur massive losses in this market, sentiment in which shifts unpredictably, like the sand in a Middle East desert. Hence, if you're a typical investor considering dabbling in the oil futures market to "pick up a few extra bucks," you may want to reconsider. You'll undoubtedly save some money if you do.

It should be noted that Dietz has the technically-correct trade. The Organization for Economic Cooperation and Development said OECD nations now have a enormous 61.6-day supply of oil in storage tanks, compared to the normal 50-day supply. Combine the above with flat-to-declining gasoline demand in the United States and very low oil demand growth in emerging markets and it points to an oil price drop. But that drop has not happened.

The oil market is looking past inventories toward an economic recovery.

"The macro-economic optimism is continuing to build," Toby Hassall, research analyst at Commodity Warrants Australia Pty in Sydney told Bloomberg News Thursday. "You would have to be looking at $60 a barrel as the next upside target."

Oil Analysis: Of course, the dollar and the possibility of rising inflation amid a U.S. recovery also are supporting oil's price, but it's still hard to justify a $60 oil price given the amount of oil sloshing around in markets. Of course, if oil remains near $60 a year from now, that would validate the bloated inventories thesis, but a year from now is an eternity in the oil pits. Further, as trader Dietz has demonstrated, one could be very technically correct and still very financially wrong in this market.

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