From the WSJ (Stocks slide ... $$$):
Stocks slid as oil prices shot above $70 a barrel amid concerns that prices might push higher still, sapping global economic expansion. ... Investors have largely shrugged off high oil prices during the past several months, recently pushing major market measures to multiyear highs. But with concerns about Iran's nuclear program mounting and demand from places such as China and India increasing, the persistent upward creep in oil is eroding confidence among investors. ... Oil for May delivery rose $1.08 a barrel to $70.40 on the New York Mercantile Exchange, the highest closing price for oil since the contract was begun in 1983. On an inflation-adjusted basis, oil remains below its record of $97.21, in current dollars, set in 1980.
And a page 1 WSJ column explains that $70 is more than basic supply and demand (Oil settles above $70 ... $$$):
Crude oil closed above $70 a barrel for the first time, highlighting a phenomenon reshaping the petroleum world: Investment flows into oil futures are supplanting nitty-gritty supply-and-demand data as prime drivers of prices.
In contrast to past bull markets in crude, this year's run-up has occurred even though oil inventories in the U.S., the world's largest market, have swelled to their highest levels in nearly eight years.
Of course, supply and demand is still working here. The only difference is we've added a speculative financial market layer to the commodities market.
The answer to the puzzle posed by rising prices and inventories, industry analysts say, lies not only in supply constraints such as the war in Iraq and civil unrest in Nigeria and the broad upswing in demand caused by the industrialization of China and India. Increasingly, they say, prices also are being guided by a continuing rush of investor funds into oil markets. Institutional money managers are holding between $100 billion and $120 billion in commodities investments, at least double the amount three years ago and up from $6 billion in 1999, says Barclays Capital, the securities unit of Barclays PLC.
The flow of money into oil, analysts say, has been prompted by a spreading belief that demand for oil will continue to rise with global economic activity as supply tightens under the influence of several factors -- among them, the West's escalating nuclear standoff with Iran; growing political violence in oil-rich Nigeria; and more broadly, steadily growing global economic activity. The three-year bull run in oil has been underpinned by strong global demand for fuel coupled with a prolonged shortage of spare capacity to pump and refine crude.
In other words, investors are buying futures contracts for oil at today's low prices and hoping to sell at some higher price in the future. In the process, today's low price becomes tomorrow's high price today. Got it?
Since early 2005, the crude-oil market is in what traders call "contango," meaning futures contracts for a given product are priced higher than that same good for near-term delivery. The price of oil to be delivered four months from now is about $3 more than oil to be delivered next month.
In short, it pays for refiners and other oil-market players to buy and hold oil now to sell it down the road. Making that trading opportunity possible, says Colorado-based oil analyst Philip K. Verleger, is the huge volume of new buyers on the other side: investors who he estimates have put more than $60 billion into U.S. crude-oil futures since 2004.
Cool word for the day: Contango!
During their meeting in Vienna last month, officials from the Organization of Petroleum Exporting Countries expressed concern about rising inventories and the growing role of financial players. Their fear: Money flows could reverse on the proverbial dime, while any move by the cartel to reduce supply would take months to affect markets.
OPEC also fears a return to "backwardation" -- the opposite of contango -- with near-term prices higher than long-term contracts. Such a flip-flop could prompt speculative buyers to dump inventories; prices could quickly drop $20 a barrel or more, OPEC officials said.
"More and more people are going to recognize that the fundamentals just aren't there to support these prices," said John Gault, an adviser to the energy industry with Geneva-based firm Nalcosa.
So, don't go Peak Oiling just yet. Today's high price isn't unambiguous evidence of oil scarcity.