As numerous observers have said of late, the causes of oil’s substantial climb from about $40 to $70 were primarily the weakening dollar and purchases by investors and speculators (if there is a difference) to hedge their inflation fears.  I’ve noted these causes ever since oil broke $50.

More recently I offered the view that some fundamental supply and demand pressures may be building on U.S. oil inventory levels due to the combined difficulties of four of America’s five largest suppliers, Mexico, Venezuela, Nigeria, and Canada, to maintain, much less increase, their supplies, perhaps accounting for recent inventory declines.  Nonetheless, inventories are above the seasonal average and I am not suggesting there is anything like a supply squeeze developing; there are ample global reserve levels, including about 4 mb/d of spare OPEC capacity.

So the real question is: if the global economy shows further signs of starting to expand, will further speculative buying keep driving the oil price higher?  My guess is that there is limited further upside from speculation because the higher the oil price goes, the more supply is likely to be increased.  New supply will come from one or both of OPEC or greater production efforts and willingness to sell among non-OPEC operators.  Given that there will be plenty of spare oil capacity in the world for the next couple of years as least, my expectation is that increasing supply due to higher  oil prices limit those price from rising much further.  

If, on the other hand, the world fails to pull out of the recession it’s possible that oil will retrace some of its recent gains.   On the other hand, failure to pull out implies that the U.S. economy continues down.   In that case the U.S.