Crude Over $50, but It Shouldn't Be

Crude oil prices pierced the $50 a barrel level Thursday for the first time since Dec. 1, 2008, but they don't belong there.

West Texas crude for April delivery was recently up $2.40, or 5%, at $50.54 a barrel on the New York Mercantile Exchange, and Brent was gaining $2 at $49.66 a barrel.

Prompting the jump in oil prices is U.S. dollar weakness. The U.S. Dollar Index, an indicator that measures the value of the dollar against a basket of international currencies, was recently sliding 1.5% to 82.92.

Downward moves in the U.S. dollar usually lead to upward moves in oil prices because oil is denominated in U.S. dollars on the global marketplace. Thus, the uptick we are seeing in crude prices Thursday is justified.

High-and-Low with Oil Prices

However, $50 a barrel crude oil is not justified. This is not a feeling, a belief or a psychic rumination. It is a fact. The current fundamentals of the crude oil market do not justify $50 crude oil. In fact, the fundamentals of the global marketplace suggest that crude should be trading around $30 a barrel, maybe even $25 a barrel.

What are these fundamentals? A lousy economy and lousy global demand. The economy is a wreck. Nobody is buying anything, so nobody is making anything. That means that nobody is buying crude oil.

Wednesday's weekly petroleum report by the Energy Information Administration demonstrates this clearly. Total stocks -- already well above the five- year average range -- rose by another 2 million barrels last week (and will probably require an upward correction when the real numbers come out in two months).