Tickers in this Article: XOM, BP, COP, SD
The recent high price for oil leads investors to consider two possible causes - that the dreaded "energy speculators" are back in the market driving up the price with very little fundamental support or that the market is anticipating a rebound in demand for oil, combined with delayed investment that will lead to a bullish environment later in the year. Oil peaked last summer above $140 a barrel before its long fall, hitting a bottom near $32 in December 2008. It traded at $61 a barrel on May 22, 2009. Yet, a look at the fundamental situation doesn't seem to support the sharp rebound.
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The International Energy Agency (IEA) recently reduced its forecast for oil demand for 2009 for the ninth consecutive month, and now says that demand will total 83.2 million barrels a day. This is down 2.8% from 2008, and is the biggest drop since 1981. However, the same organization warned in a different report that $170 billion of capital investments in exploration and development have been delayed or canceled due to the low price. The details of the report are confirmed by company-specific news. In late April 2009, BP (NYSE:BP) cut its capital-spending forecast from $20-21 billion to slightly under $20 billion. Exxon Mobil (NYSE:XOM) delayed its development of the Barzan gas field project, a $5 billion joint venture with Qatar. Large independent exploration and production companies also have cut capital expenditures sharply in 2009. SandRidge Energy (NYSE:SD) has cut its 2009 budget from an original level of $2 billion to a range of $500-700 million. (For more, read Unearth Profits In Oil Exploration And Production.)

Some companies consider other uses for cash to be higher priority. ConocoPhillips (NYSE:COP) stated that if oil prices moved higher it wouldn't raise its capital budget of $12.5 billion, but would instead increase dividends or share buybacks. Inventories are robust as well. The Department of Energy reported that weekly U.S. crude oil inventory reached 368.524 million barrels in the week ended May 15, 2009. On a days of supply basis, the U.S. has 25.6 days in inventory, the highest since the mid 1990s. The market could be looking forward to when the cuts by the Organization of Petroleum Exporting Countries (OPEC) has an impact on the market. The group last year agreed to cuts totaling 4.2 million barrels of production in order to cope with the fall in demand. The latest report for April shows that OPEC was 78% compliant with its agreement. Oil bulls believe that when demand bounces back, the market will be undersupplied and give a lift to prices. (Read more on the oil and gas industry in our Oil And Gas Industry Primer.)

Bottom Line
The price of oil has nearly doubled off of its bottom despite what some investors consider to be little confirming fundamental support. Either speculators are back in the market or maybe they know something the rest of us don't. (For more, see The Industry Handbook: The Oil Services Industry.)

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