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Oil Prices: It's Not About the Oil

Crude oil prices are again breaking records, but not because of real issues with supply and demand
Timothy A. Clary/AFP/Getty Images

Oil prices have resumed their wild ways. On Feb. 20 crude oil settled at $100.74—the highest ever settlement price—the second consecutive session with a settlement above $100. The spike was produced by a laundry list of news, from cold weather to a refinery explosion in Texas to the (falsely) rumored murder of a Nigerian militant leader. But when government inventories on Feb. 21 showed the nation's crude oil supplies rose more than expected last week, West Texas crude shed $2.51, to close at $98.23.

What's driving oil prices? Economics 101 says price is determined by the balance of supply and demand. But when it comes to the oil market, fears and expectations have been trumping economic rules and carrying the day. "These movements have nothing to do with supply or demand, or with oil for that matter," says Fadel Gheit, senior analyst with Oppenheimer (OPY) in New York. "There is more exaggeration than ever before in this market."