In two recent posts (“Is Oil Overvalued?” and “Oil Prices: Speculation vs. Fundamentals”), we have highlighted the always volatile issue of crude oil prices.  The first post asked why despite a global recession and healthy level of OPEC spare capacity, oil prices have been on an upward trend since early-2009.  It suggested that, if there are fundamentals underlying the trend, perhaps steadily rising oil demand is the cause.  The second post, with reference to a recent investor’s conference by global investment banking firm Goldman Sachs, explained that in fact this is exactly the reason that they have for bullish price outlook.

Today, we bring your attention to another skeptical viewpoint of this “fundamentals” argument:  OPEC (Monthly Oil Market Report).  Careful to avoid the word “speculators,” OPEC outlined suggested that inventories should have provided a sufficient supply cushion.  They go on to warn that “should developments turn out to be less positive than expected, market attention will revert back to weak oil fundamentals” (emphasis added).  They also state that, “prices are likely to be particularly vulnerable to economic developments during the upcoming low-demand second quarter.”  They also highlight that money managers have boosted net positions by more than 70 percent since the start of December (graph reproduced below).

It would be imprudent to posit that prices will not continue on this trend knowing what we do about forecast oil demand, but it appears that today’s prices could be driven upwards more quickly in part because investors believe they will pass $100 per barrel again in 2011 (which remember, is still a year away).  Whether prices, if they are already inflated, can remain at their current level without justifying fundamentals is unclear.  Based on current economic projections, it would be surprising to see fundamentals alone justify prices outside the $70 to $90 per barrel range in the coming months.

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