What oil did next

Oil: Oil price bulls and bears have both had their triumphs in recent history. The price of crude rose to $147 a barrel in July of 2008 only to plummet to $33 a barrel a few months later. It swung past $82 a barrel this week because of the cold snap, and is up 18 per cent since mid-December. But barring heightened tension in the Middle East, oil looks likely to slide in the short term.

Demand remains relatively subdued, in spite of the massive stimulus applied to the global economy. This is especially true in OECD countries and the United States, the largest consumer of energy. US crude oil inventories actually rose by 1.3 million barrels last week when temperatures plummeted, according to the latest figures by the Department of Energy. Elsewhere in the OECD, oil inventories have fallen, but only slightly, according to the International Energy Agency. They are still high, at nearly 60 days of demand.

Other factors could weigh on the price in the immediate future too. Easy money and the weak dollar has made investing in commodities relatively attractive. But the central bankers' generosity could soon come to an end if inflation moves from a threat to a reality.

Oil bulls argue that global economic growth, in particular in China and other emerging markets, will be strong enough to sustain further gains. But the recovery remains too uncertain to call. China has just hiked interest rates on its three-month bills in an effort to slow bank lending, which could ultimately dampen demand. That alone shaved off a few cents off the oil price on January 7.

The bulls may eventually have their day. Production is falling in non-Opec countries, even factoring in some mega fields coming on stream in Russia and elsewhere. But it will not be until mid-2011 that global demand will outpace supply, according to Goldman Sachs, which predicts an average oil price of $110 for that year. In the meantime, it may make sense to run with the oil bears.