After a long decline, oil is gushing higher.
The decline began last summer when oil was trading above $145 a barrel. As the U.S. economic slowdown spread globally, demand for oil dried up driving the price to just a fraction of the former highs by mid-February.
Since then, oil has begun to bounce back as OPEC cut back production and massive economic stimulus actions in the U.S., China and U.K. have begun to move the needle on economic activity.
The $3 billion United States Oil Fund (USO) which tracks the spot price of oil with short term future contracts is up 50% from February lows. The massive size of the USO fund and problems associated with monthly rollovers led the manager, US Commodity Funds, to introduce the United States 12 Month Oil Fund (USL) which holds a series of future contracts with maturities spread over the next year.
Continued economic recovery combined with persistent geopolitical risk in places like Nigeria promise to pressure oil prices above the current $62 per barrel level. In fact, the Saudis are targeting a “fair price” of $75 to $80 per barrel.
A double dip recession or a sudden flight to the safety of the U.S. dollar would keep a lid on oil prices or even cause levels to turn lower.