Watching the oil market so far this year has been a bit like watching a child let go of a helium balloon. The balloon floats higher and higher out of the child's reach. The child cries and jumps, reaching to try and pull it back down. Our grown-up wisdom has us believe that eventually the balloon will pop, high up there, or the helium will leak out and the balloon will fall. But we can't be sure, and when it might happen is anybody's guess.

The only think we know is that that kid ain't gonna see that balloon again.

Sometimes it's hard to be a kid.

And sometimes it's hard to be an oil consumer, trying to figure out when - or even if - oil is going to come back down.

The latest news is full of conflict.

On one hand, we have the weekly polling of industry analysts by our good friends over at Bloomberg. As Brad Zigler has discussed previously here on HAI time and again, sometimes (okay, a lot of the time) the analysts' predictions and reality don't match up. This week they seem to be splitting the difference with 46% of those polled predicting prices down this week and 38% predicting prices up. Those oil-bears are focused on demand in the U.S. (declining) and U.S. crude oil inventories (rising). Since the U.S. is such a huge oil consumer, these two should mean a decrease in prices. Note the use of the word "should."

On the oil-bull side, we have the president of OPEC, Chakib Khelil, predicting that we're going to see oil at $170 a barrel before the end of the year. For once, speculators aren't the scapegoat. (Hey, when the left and the right agree on something related to the economy, chances are you should be taking them seriously.) This time, blame is being laid at the Fed's front door. "The decisions made by the U.S. Federal Reserve and the European Central Bank helped the devaluation of the dollar, which pushed up oil prices," Khelil said in this article on Bloomberg. It is a valid point - oil, which is traded in dollars - gets more expensive as the dollar weakens. The decision to not change the Fed's funds rate may help the U.S. economy in one way, but Kehlil thinks the ripple effect will mean ever pricier oil.

Crude oil on NYMEX touched an all-time high of $142.60 a barrel on Friday, closing at $140.21.

The immediate bull run was helped by Libya's threat on Friday to cut production. Why in the world would anyone cut production at a time of record oil prices? Would you? I wouldn't. It goes against logic to voluntarily sell less of something, waiting until prices go down to sell more. But the threat of cuts is an interesting response to the bill that was passed last month in the U.S. House of Representatives that would open the door for the U.S. to sue OPEC members on antitrust grounds - you know, limiting oil supplies and setting crude prices together.

The very idea of suing OPEC strikes me as ludicrous - where's the jury going to come from on that trial, exactly? I know, theoretically, OPEC could be sued in the U.S. courts, but how exactly do you enforce a loss? Troops? Still, the White House opposes the bill, saying that targeting OPEC investment in the United States as a source for damage awards "would likely spur retaliatory action against American interests in those countries and lead to a reduction in oil available to U.S. refiners."

Of course, right now the bill is just that - a bill. The Senate has not voted on the measure, and the timing of Libya's threat and increasing oil prices just might have a little influence on which way the vote is going to go - or even if one gets scheduled. Though this is an election year, which means anything can happen. And while it seems a little naive to sue OPEC just because we are not getting our way, there is support of the idea. "Pump more oil!" we seem to say with a stomp of our foot. ("Gimme back my balloon!") Of course, if we stomp too loudly, maybe OPEC will take its toys and go play in some other sandbox; perhaps China's?

OPEC, of course, has long taken the position that the world market is oversupplied with oil, even while Saudi Arabia will begin pumping out more oil this week. The oil minister from Qatar, Abdullah al-Attiyah, was quoted by Reuters on Sunday saying, "It is not wise today to cut supplies even though there is a surplus because we do not want to create a psychological problem." He went on to say:

If more crude won't benefit the market, what is it going to take to stop oil's flight?

Perhaps the problem is not that more oil needs to be pumped. Perhaps the bottleneck is elsewhere in the chain. Maybe OPEC is saying that the market is well-supplied because there is nowhere for more oil to go. If oil cargo is in floating storage, why isn't it being taken to a refinery someplace to be turned into diesel (currently sitting at $4.648 a gallon) or gasoline (at $4.079 a gallon)?

Maybe they can't. Refineries are currently working at around 88.6% utilization - that's way, way down from the historical norms for this time of year.

The chart above is the average utilization of refineries in June. Average refinery utilization is at the lowest it has been since the Energy Information Administration began providing statistics. Now, utilization could be down because demand for gasoline is down, or it could be down because refiners' profit margins are tight and refiners are choosing to produce less gasoline. As Zigler pointed out, refiners' profit margins do tend to shrink right about now. But the lack of oil hitting the market is simply a fact. Despite all the talk, nearly every oil-exporting country is exporting less every year. Tanker shortages? OPEC ineffectiveness? It's all connected.

Maybe the balloon is the wrong metaphor for the summer of 2008. Unraveling oil prices may be more like upsetting a row of dominos - one thing affects another, until everything is lying in chaos. Either way you picture it, the picture is disheartening.

Links:

Crude Oil: Low Refinery Utilization & High Prices? Cattle Network June 18, 2008

Oil in Beverly Hills 'Humming' Where Britney Shops (Update 1) Bloomberg June 27, 2008

• Are Oily Characters Behind Crude's Price Move?   »
• Just a Commodities Correction - Not the End of the Bull (Part 2)  »
• The Economic Consequences of Falling Oil Prices  »
• U.S. Energy Weather Update  »
• Valero, Tesoro: Margin of Security in Refinery Assets  »

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