Why oil prices are probably headed back up

Oil prices have fallen again today, and among the victims of a U.S.-led intervention in the market are OPEC and oil speculators. But will they be for long? The answer is probably no.

As a reminder, a multinational cast of co-conspirators has opened the spillgates of their strategic petroleum reserves, adding 60 million barrels of oil onto the world market. The reason is economic: Oil prices were already declining, but the consensus is that they would have increased substantially toward the end of the year, with no end in sight, because of Chinese oil demand and constrained supplies, hence complicating the sluggish global economic recovery. Nobuo Tanaka, head of the International Energy Agency, which along with the United States coordinated the intervention with China, India, and Saudi Arabia, along with Japan, Germany, South Korea, and others, said the extra oil is intended to tide over the market until a planned Saudi increase in oil production takes effect.

Yet, as we’ve discussed, what we’ll probably see in response to the intervention — once traders get up from the mat and dust off their britches — is a case of brinkmanship. Traders will redouble their bets in the futures casino, gambling correctly that neither the Obama administration nor other members of the Energy Information Agency will have the stomach to continue for long emptying out their reserves onto the market.

This is a wily market. Already U.S. regulators are investigating the possibility that some traders caught wind of the move before it happened and perhaps unlawfully profited, writes Jerry Dicolo at the Wall Street Journal.

A lot of observers have been impressed with the U.S. move. The New York Times, for instance, editorializes that it could provide a boost for the U.S. economy. At the Financial Times, James Macintosh writes that it’s meant as a new global economic kick-start since the U.S. Federal Reserve’s latest $600 billion pump-primer, known as "QE2" — or a massive purchase of Treasury bonds whose impact is to lubricate the weak economy — ends Thursday. And oil analyst Peter Beutel said the move "could work" in terms of helping the economy.

But at Deutsche Bank, oil analyst Paul Sankey said the United States has effectively injected itself into the equation as another speculator, and the result will not be as intended. "Every oil market comment from the White House will [now] become a market-moving event," Sankey writes in a note to clients. "In short, this move has added to oil markets’ fear of volatility.

Oil analyst Stephen Schork told Bloomberg that the move will backfire and in fact convince traders that there is something very wrong in the market, which will be reason for them to push prices back up.

One big point is that it’s highly unlikely that anyone is going to buy much of the offered-up barrels either from the SPRs or the Saudis, as David Bird and Ben Lefebvre write at the WSJ — the market is satiated, and stockpiles overflowing. Instead, both the U.S.-led and Saudi interventions are more symbolic gestures — a message to underscore the point, even for the hardheaded traders, that the market is fully supplied and that there is no reason for them to keep pushing up prices.

But in the end, traders will push up prices. Look for such a move toward the end of the year or the beginning of 2012.