By BRIAN BASKIN

A charge toward $80-a-barrel crude is looking more remote after a week that began with a pirate attack and ended with encouraging economic data failed to rouse a flagging futures market.

When the oil market is primed to rally, a threat to supplies—even a remote one—is often enough of a catalyst to push prices higher.
Last week’s events indicated that oil may be headed in the opposite direction: The hijacking of an oil tanker by Somali pirates didn’t budge prices, and Iran’s capture of a yacht carrying five U.K. citizens was good for only a $1 boost last Monday. The Iranian oil minister’s threat to cut off crude exports was ignored by traders the next day, and a spill along a pipeline in Alaska’s giant Prudhoe Bay oilfield warranted barely a blip on trading screens.
58 cents from a week earlier and close to a two-month low. Crude hasn’t ended above $80 a barrel in a month.

The market’s rejection of an early rally off of an unexpected decrease in U.S. unemployment on Friday would have been especially disturbing for anyone betting on a quick return to $80 crude. Joblessness is among the most closely tracked economic indicators in the oil market, as a decline could signal a rise in gasoline-guzzling commutes to drain bulging inventories.

But potential supply disruptions and growing optimism about the economy aren’t resonating in a market where a major contingent of investors is using oil as a hedge against fluctuations in the dollar’s value. The stronger the dollar, the more expensive oil becomes to holders of other currencies, necessitating a price drop. The outlook for global oil supply and demand is of secondary concern, particularly when stockpiles and spare production capacity have ballooned since futures hit record highs in 2008.

“Some of the geopolitical scares don’t pack quite as much punch as they did two years ago,” said Rachel Ziemba with Roubini Global Economics, adding “at the end of the day, oil is…being used as a proxy for risk appetite.”

Iran may need to wait for a while before regaining its ability to juice oil prices.

The International Energy Agency estimates that global oil demand will need until 2011 to fully recover from this year’s forecast decline of 1.5 million barrels a day. Stockpiles could take until the second half of next year to begin falling, analysts with J.P. Morgan Chase said last week. Meanwhile, Saudi Arabia and other producers have developed the ability to ramp up output by more than 6.5 million barrels a day, nearly double Iran’s current production.

“It’s not 2007 anymore, where every potential barrel is needed in the market,” said Rick Mueller at Energy Security Analysis Inc.

Oil-market participants also need to have their attention diverted from the dollar and stock markets. Such a shift will hinge on when and how central banks wind down policies aimed at boosting the economy by loosening the money supply, said Harry Tchilinguirian, with BNP Paribas. Even then, oil would remain beholden to currency rather than relations with Iran if concerns about inflation begin to drive trading, he said.

Sources: The wall streer Journal

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