Oil flirting with $60 as reality of slow recovery sets in

Assuming 'rogue' traders aren't distorting the markets, the price of oil is set by simple supply and demand forces. Or at least, by what traders believe the forces would amount to. An attack on a Nigerian oil field that threatens the world's oil supply would push prices up, while news of growing unemployment that could affect demand would push them down.

Still, simple as it sounds, sometimes there's just too much news pushing, pulling and affecting supply and demand forces in all direction. Take today, for example. While crude prices ended up closing higher, they wavered around $60 per barrel following news of tepid retail sales and soaring continuing jobless claims. Consumers, fearing job losses and being bombarded by bad economic news daily, are cutting back. On everything.
Looking at it from a different angle, though, oil snapped a six-day slide today. If on Wednesday the price of oil fell 5.74 percent as weekly inventory data showed a steeper-than-expected build in gasoline stocks, today oil got support from companies announcing refinery shutdowns.

Meanwhile, Joe Lazzaro reported Wednesday that "OPEC, producer of about 40 percent of the world's oil, now expects global demand in 2013 to be less than last year's level" because it expects the recovery to be U-shaped.

On the bright side, however, the International Monetary Fund said in a revised forecast yesterday that the world economy will expand 2.5 percent in 2010, but of course, that's after contracting 1.4 percent this year. Also, China's vehicle sales jumped 48 percent in June. Both these reports indicating possible better demand for oil in the future.

The question is now whether the optimism that helped crude prices to more than double from $33 a barrel lows in March to over $70 last month will continue. In the past week, that optimism was pretty much gone altogether as reality set in that this is going to be a long and slow economic recovery. Equity markets slumped and oil prices declined to even dip below $60 a barrel intraday today -- a seven-week low -- as concerns over waning oil demand grew. During tough economic times companies and consumers cut back on oil consumption. Will the supply side adjust if that's the case?

While it's always better to see oil trading on fundamentals rather than speculation, it's hard to peg supply and demand forces -- not only where they would meet, but often times the data itself can point to different direction on either force. And if you're not confused enough, let's not forget the effect the U.S. dollar has on oil as U.S. dollar denominated commodity.
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