Already reviled for last year's financial meltdown, Wall Street is now being blamed for a sharp rise in oil prices that could undermine the fragile North American recovery.
Buoyed by expectations of strong Asian growth, financial traders have piled into oil futures in the past several weeks, driving prices to 15-month highs. Analysts say the rising prices come despite continued weakness in U.S. demand, and pose new challenges to hard-pressed consumers.
"Wall Street is certainly all bulled up," said Stephen Schork, an energy analyst who publishes a popular newsletter.
"It's the global demand - you certainly can't look at demand in the United States and get excited about owning energy."
Mr. Schork said crude prices broke through a narrow trading range above $82 (U.S.) last week and may climb further in a technical rally before running out of steam. But he added it is hard to forecast sustained increases, given the weakness of the developed-world economies.
Oil's near-term future seems to be tied to China... It's no longer consumers in the U.S. who are driving global demand. Adam Sieminski, Deutsche Bank
Crude prices on the New York Mercantile Exchange - which sets the benchmark for Canadian producers - seem to be defying grim economic news. On Friday, the U.S. government reported the economy shed 85,000 jobs in December, but after an initial selloff, oil prices rebounded to close 9 cents higher at $82.75 a barrel.
After briefly dipping below $34 a barrel early last year, oil prices began climbing as traders took heart from the bottoming-out of the global recession and encouraging news from China and other developing markets. A slumping U.S. dollar and rising stock market were also seen as factors in the rise of crude and other commodity prices.
By New Year's Day, crude prices had touched $81.
Still, speculative money kept piling into the market last week, as evidenced by the jump in non-commercial contracts on the futures markets reported by the Commodity Futures Trading Commission.
"Almost all of that new buying is coming from investors," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy risk management firm.
Mr. Beutel noted that North American refiners continued to be squeezed by rising crude prices and weak demand, with inventory levels for both crude and petroleum products well above levels from last year. And he warned the investor-driven price increases will place a powerful drag on the economic recovery.
"We know that every penny increase at the pump takes $4-million per day out of the Americans' pockets," he said. "Every time these prices are run up, it's the same as instituting a new tax on people. It's a subtle and insidious tax that nobody votes for; it's something that has been engineered on Wall Street."
Deutsche Bank energy economist Adam Sieminski said plunging energy prices helped soften the recession's impact on consumers last year, and now the reverse is happening.
"It's going to take money out of consumers' pocketbooks and that's going to be going to the oil industry, which doesn't need it as much as the auto industry does."
But traders are clearly focused on solid growth from China and other emerging markets to justify their bullish view on crude prices.
"Oil's near-term future seems to be tied to China," the Deutsche Bank economist said. "It's no longer consumers in the U.S. who are driving global demand."
China's economy is estimated to have grown by 8.2 per cent in 2009, and is forecast to post 8.9-per-cent growth this year, according to The Economist Intelligence Unit, a division of The Economist magazine.
The U.S., which accounts for a quarter of the world's oil consumption, saw its economy contract by an estimated 2.5 per cent last year, and is forecast to grow at a modest 2.7-per-cent clip this year, with employment lagging economic growth.
However, Deutsche Bank economists expect the rebound to lose some steam in the second half of the year after China and other emerging markets have finished rebuilding inventories.
"Our thinking is that by the middle of the year, we're actually going to see some headwinds to the global economy, and then oil prices will be vulnerable to the downside," Mr. Sieminksi said. "But that's not the consensus view - the consensus view [among energy economists]is for prices to go up gradually throughout the year."