Oil's recent roller-coaster ride has not only proven the truth of the "endless bid," it's posed an impossible roadblock to whatever recovery anyone might have hoped for.

The endless bid is what I have been calling the power of investment interest in oil to affect prices in a very big way. We saw oil move from the low $30-a-barrel area coinciding with the S&P 500 lows in March to top out recently near $75. No one has been able to find a fundamental reason for this move, because it is clearly and almost singularly investment driven.

But what the investor gives, he also quickly can take away: Retreats from risk in the stock market, dollar and the recent flight into Treasuries in the last several sessions has seen oil plummet almost $10 in fewer than six trading days.

Oil's Out of Control

We are faced with some very difficult and even grave questions when viewing this ridiculous volitility:
  • Is the price we pay for oil dependable?
  • Are commodities now linked forever to stocks?
  • Is an economic recovery possible if oil cannot trade based upon supply and demand, and is only instead pricing at the whim of capital?

We've watched in the last several days as oil retreated with the S&P almost in lockstep -- it is no coincidence that it is rallying back a little today either, in light of the follow-through from Monday's late rally.

But the oil market does not operate like the stock market in many ways.

Stocks have a vast array of financial metrics such as earnings, growth, cash flows, inventory, etc., with which we can measure their value.

But oil has none of these, which makes valuing it more difficult to find -- and its price even more difficult to rely upon.

The commodity markets were created to ascertain value and price by allowing entry only to those participants who depended upon price -- producers, drillers, oil companies, transport companies and various end users. But now, those participants who "care: have been dwarfed by the millions of investors who want exposure to oil as an investment. It has turned the market into an unreliable mockery of what it once was and who it looked to serve.

But if we have lost control of our oil market, we are facing some very thorny problems.

If we ever see S&P 1200 again, does that mean it can only accompany $120 oil?

If the S&P finds a return to 1500, does that translate to an oil price of $200 a barrel or more?

Can the S&P move back to its previous strength, and can the U.S. and global economy ever regain its previous strength with oil trading at $200 or more a barrel?

It wouldn't seem so. While most of the blame for the economic problems we have witnessed in the last year cannot be placed on oil, there is no question that fundamentally suspicious oil prices over $120 a barrel last year certainly helped contribute to the catastrophic declines we saw.

Pricing of commodities has always been too critical to our success to leave to the chance of unregulated markets.

We'll need to regain control of our oil markets as part of a process toward full recovery it seems, allowing them to trade and price again with regard to their fundamentals and less at the whim of capital inflows and withdrawals.

There are some ways this might be done.

They would all be difficult, unpopular measures, and so far, no one in Washington or elsewhere has the will to talk much about them. But I believe in time they will have to.

What can be done? And who will benefit?

Counterintuitively, you wouldn't find any of the big consolidated oil companies such as Exxon Mobil ( XOM), Chevron ( CVX), BP ( BP) or ConocoPhillips ( COP) complaining about a fundamentally priced market again. You'd find full-blown cheering coming from the refiners like Valero Energy ( VLO), Tesoro Energy ( TSO) and Sunoco ( SUN).

I'll try to tackle these questions in my next column.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.

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