Oil Prices Up, but Future Direction Is Murky

Crude oil prices climbed to $77.58 a barrel Thursday, driven by the weakening of the U.S. dollar and rising optimism about prospects for a global economic recovery.

Oil prices have been fluctuating between $65 and $75 a barrel since the beginning of June, and many analysts saw the recent increase as a sign that prices would now fluctuate in a higher range. The rising price of oil has given a boost to oil drilling, and the rig count in the United States hit a six-month high last week.

"Why is it strong? Because the stock market is rising and that's an indication that cash in general has come back into the market," said Adam E. Sieminski, chief energy economist at Deutsche Bank.

Another reason, he said, is that "the dollar is incredibly weak against the euro." Because oil is priced in dollars, the cost of oil in euros or yen has changed little.

In the United States, gasoline prices remain moderate and far below levels of a year ago despite the climbing crude oil prices. The nationwide average for regular gasoline was $2.49 a gallon Thursday, 7 cents less than a month ago and 64 cents a gallon lower than a year earlier. While gasoline consumption so far this month has climbed to levels nearly as high as the 2006 record for the month of October, consumption of diesel used most often in trucking remained weak, a sign of an anemic economy.

Given the continued sluggishness of the economy, high unemployment rate and large amounts of excess oil production capacity around the world, analysts said a sudden upward spike was still unlikely.

"This still appears to us to be a market heading for relatively gentle upwards transitions in bands, rather than being primed yet for a more explosive break-out to the upside," said oil and commodities analysts in a Barclays Capital report. Barclays analysts have been among those forecasting higher prices. They said prices would fluctuate between $70 and $80 a barrel.

But some analysts were still unconvinced that prices would continue to creep upward.

"There is more than adequate supply, more than adequate inventory and less than adequate demand to propel prices to this level," said Edward L. Morse, head of research at Louis Capital Markets, a New York-based brokerage firm.

"Most of the price movement clearly stems from financial flows," he said, noting a spike in trading positions taken on the New York Mercantile Exchange and Intercontinental Exchange. "It will be interesting to see what happens if the assumptions on which rising prices have been based erode."

One closely watched factor has been reports that China's economy may be recovering quickly. Paul Ting, president of Paul Ting Energy Vision, said China's economy was benefiting from the government's massive stimulus spending and from a boost in exports.

"The October demand growth was very, very strong," Ting said.

In a sign that China expects oil prices to remain high, the government and leading Chinese firms continue to hunt for new reserves. China National Offshore Oil has been vying with Exxon Mobil for a $4 billion stake in a giant oil discovery off the coast of Ghana, and has been reported to be in talks to acquire blocks off the shore of Nigeria. Petrochina International Investment paid $1.7 billion for a stake in Canada's Athabasca oil sands project.

"I would think [the Chinese] see as this as a fairly cheap oil price and in five to 10 years will look back and think they made a good deal," said Will Riley, an analyst at Guinness Atkinson Global Energy Fund.

Ting said China relied on imports for 57 percent of its oil needs, up more than 10 percentage points in the past five years.