Oil Price

The oil price started to anticipate economic recovery and improved
oil supply / demand fundamentals early this year. That in itself is
remarkable, given how oil tends to weaken and dawdle following one
of its periodic price busts. Then matters veered toward ridiculous
as oil surged to over $70 bl., near the top of a longer term range,
bubble price moves excluded. In fact, oil above $55. is trading as if
there are already pressures developing on excess production capacity.
Nothing could be further from the truth. There is significant excess
capacity at the well head, and there is a huge amount of oil in
storage as carry stock. Moreover, demand remains subdued.

Last week the Commodity Futures Trading Commission announced
it would hold hearings this summer on the advisability of limiting
position size in the futures market. It realized that hedgies and long
only oil index funds were holding huge long positions. These are funds
with no intention of ever taking delivery, and guided by computer
models, are essentially momentum followers who have again driven
the price to levels out of line with fundamentals.

With the pro big oil Bush / Cheney team out of the picture, the CFTC
and other power centers in DC have a freer hand to stop or at
least retard this foolishness before it again does substantial damage
to the economy.

Oil at $60. ought to be trading no higher than $55. and, probably even
less on supply / demand fundamentals. If oil, which has corrected
sharply in recent weeks, is set to progress more sensibly, a range of
$48 - 61 bl. would make sense from a purely technical perspective.

It will be interesting to see if the newer big players in this market
are ready to challenge the CFTC with some "in your face" fresh
buying or whether they will be smart enough to lay lower at least
for the summer.

The oil price is getting modestly oversold short term.