The sharp rise in oil prices since February was triggered by Middle Eastern unrest, fueled by speculation and unfounded on real supply and demand factors . . . I expect more price weakness.

It is quite clear that the recent 32% increase in oil prices started coincidentally with the breakout of civil war in Libya in mid-February following the Egyptian revolution in January.  The price of West Texas Intermediate Crude has dropped 14.6% since peaking in late April.  The jump in prices has triggered increasing gasoline prices and fears of inflation.  As can be seen in the second chart of the amount of actual barrels of crude being held in inventory (its excludes the oil in the Strategic Petroleum Reserve), the price increase was clearly not supported by a shortage of crude oil supplies.  In fact, crude oil inventory is near a record high level if the measure from the critical Cushing, OK interchange is valid.  The logical conclusion is that the price increase was more of a speculative affair and consequently may be short lived.  Speculative driven moves go up fast and come down faster.  The implications of a continued drop in oil prices are reduced inflation fears, improved consumer spending and available money flows for more productive investment.   Jeb Terry, Sr. May 8, 2011

Source: Dian Chu, EconMatters as appeared on Investment Postcards from Cape Town

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