Investors who are still convinced oil prices are headed higher even if the economic recovery turns out to be much slower than initially expected must have been taken by surprise last week, as oil prices fell 10%, dragging energy stock prices down with them.

Energy investors got another kick in the pants on July 9, when Chevron (CVX) announced that its second-quarter earnings would be hurt by lower U.S. refining margins and currency effects. The week was capped by yet another setback for the energy crowd: On July 10, Nymex crude oil for August delivery finished 55% lower, at $59.86 a barrel, 18% lower than its recent peak above $73 a barrel on June 30.

Much of last week's pessimism about energy stemmed from the announcement that the Commodity Futures Trading Commission plans to push for regulations that would sharply limit the extent to which hedge funds and other financial market speculators can invest in oil futures. But appreciation in the value of the U.S. dollar against key foreign currencies like the euro also curbed appetite for commodities, whose popularity has largely been based on the protection they offer from inflation.

Speculators in the Mix There's still a lot of disagreement among analysts and fund managers as to what level oil prices should be at, based on current and projected future supply-and-demand fundamentals. Fadel Gheit, an analyst at Oppenheimer & Co. (OPY), thinks oil prices should be between $45 and $55, with $55 being "the speed limit" if demand rebounds when the global economy recovers, given how much excess supply there is around the world. He sees the clear hand of speculators in the price of oil jumping 120% between December and the end of June even as demand forecasts were declining.

On the opposite side, Andrew Lees, lead manager of the AIM Energy Fund (IENAX), believes prices need to be significantly higher to give producers incentive to start new projects when they don't know how high the future carbon capture costs that may result from pending legislation will be. "If climate legislation truly demands we start sequestering all CO2 [emissions], there's no technology to do that right now," he says. "So what price do you have to put on crude oil to justify future investment when you have no idea what the cost of future carbon capture is going to be?"

As long as that cost is unknown, it's impossible for producers to project what the marginal cost of production will be in the future, and therefore how high an oil price is needed to guarantee a certain rate of return, adds Lees. He believes that's been one factor contributing to the rapid runup in oil prices in recent weeks.

Surge Seen as Premature Daniel Rice, portfolio manager of the BlackRock Global Resources Fund (SSGRX), more than 64% of whose allocation is in energy stocks, says the surge in oil prices above $70 was premature given the amount of excess inventory worldwide. He thinks the runup was more of a trade by investors seeking to hedge against a weakening dollar than something based on supply-and-demand factors.