I think large passive index investors and speculators are keeping oil prices artificially high. The financial crisis of 2008 was largely caused by a lack of liquidity as counter-party risk soared and short-term lending evaporated. The crude futures market did not buck the trend. Oil prices hit $147/bbl in July of 2008 and ended the year under $40 as investors exited their positions. The CFTC is currently reviewing margin requirements and position limits to non-commercial holders of crude futures. If the CFTC decides to adopt harsh measures, liquidity will once again come out of the market, and prices will fall. I think this is a risk many speculators and/or passive commodity investors aren’t paying much attention to. I also think the passive index investors such as pension funds and insurance companies may reduce their energy allocation weightings as they realize the diversification benefits of owning oil is now is much less given crude’s recent 67% correlation with the S&P 500 vs. -38% when this argument was first being pitched on Wallstreet back in 2003.Whither Oil ? In 'Oil Rally or Another Head-Fake', The HARD ASSETS INVESTOR argues that its going higher (in the process, reviewing the concepts of backwardation and contango ) :
Crude oil prices have broken to the upside of a six-month congestion area and are pointing to a potential target price of $105. There's a much greater likelihood of that target being reached if we see contract spreads shrink further and flip to backwardation.