PhotoMotorists have been enjoying reasonably-priced gasoline for over a year now and probably don't care about, or pay much attention to, the daily fluctuations in the price of oil.

But that price, and whether its long-term trend is up or down, will have a lot to do with whether a fill-up becomes a painful experience once again.

Lately, oil prices have been moving higher, well off their recent lows but a far cry from the $100 a barrel producers routinely got just a couple of years ago. After bottoming at around $27 per barrel, oil is now back above $40, even though there is plenty of oil to turn into motor fuel.

But why would the price of oil go up when, from all indications, there is more supply than refiners know what to do with? Because the oil futures market is setting the price, and investors have been betting lately that two things will happen in the future – demand will increase and producers will pump less oil.

Betting on oil

If that happens, the supply and demand ratio will be more in balance and oil will sell for a higher price. Since markets are future oriented, big money is pouring into oil-related investments ahead of time, betting those assets will quickly rise in price.

But the movement of that money, and the momentum it carries, can be a self-fulfilling prophecy. More traders buying oil futures will bid up the price. As the price rises, more investors become convinced that the price will rise even more, so more money chases oil, resulting in still higher prices.

In 2008 oil traders bid the price of oil to over $120 a barrel, only to see it crash a few months later during the financial crisis. Unfortunately, consumers who need gasoline are whipsawed by this kind of market price action.

Reality intrudes

While the momentum on Wall Street appears to be building – and make no mistake, Wall Street wants higher priced oil – reality seems ready to intrude. The Wall Street Journal reported Monday that a proprietary industry report shows oil stockpiles at the main U.S. terminal at Cushing, Okla., is growing, not shrinking as many believed. That caused an immediate drop in oil prices.

But consumers in many parts of the country are seeing sharp increases at the gas pump, largely because the gasoline market has been following oil prices higher. The AAA Fuel Gauge Survey shows the national average price of self-serve regular is up just three cents a gallon in the last week.

But the statewide average is up six cents a gallon in Illinois and nine cents a gallon in neighboring Indiana.

What's clear, however, is that the world has plenty of oil at the moment to meet its needs. How much, exactly, is hard to know because there are so many different sources and not all are transparent.

Gasoline prices are still low by recent standards but remain hostage to a turbulent oil market. Supply and demand should keep them that way for some time to come, but there are plenty of market forces that will do their best to keep them going higher.


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