Has oil returned to former glory?

US Oil Market

In the light of oil recently breaking the $80-a-barrel mark, some analysts claim the commodity is set to return to the glory days from before the global economic crisis. However, many are not convinced despite a glut of investors seeking sanctuary with crude, as they continue to dodge the dollar.

Not since September 2008 has optimism been so high in the oil industry, after over 12 months of hardship and volatility, but despite a surge in oil prices there is little reason to believe things will keep on improving. For one, oil market fundamentals are still very weak, prompting some experts to suggest that prices may in fact retreat.

BusinessWeek reports how experts such as Phil Flynn, an oil analyst with PFGBest Research, a futures brokerage, believe the "dollar-led rally" is "unsustainable".

Investor "safe havens"

The dollar is still far weaker than before the crisis, and the fact the green-back is the main driver behind the 15 percent recovery in oil over the last week, makes the recovery itself unsustainable. Since March the dollar has fallen 15 percent in inflation-adjusted value compared with a basket of currencies of its major trading partners. Traders have sought to cushion the fall in the value of the dollars they are holding by buying futures in traditional safe havens such as gold, as reported by BusinessWeek.

The volatile nature of the dollar means oil prices could crash as quickly as the have climbed.

The economic downturn led to oil companies making serious cutbacks, with exploration and production baring the brunt, which consequently drove down prices. But this also means that when the world's economies do recover, there will be a shortage where there once was a glut.

In the US alone, exploration is down 27.8 percent from a year ago, with 309 rigs actively drilling, compared with 428 at this time in 2008, according to the Baker Hughes Rig Count.

Unreliable oil

Oil is no longer the nailed on success for investors that it once was, and its unreliable reputation that has arisen since the global crisis will take sometime to shake. There are mixed signals coming from within sector as to whether the recovery will continue, but the weakness of the dollar cannot be ignored.

As Edward Morse, managing director at Louis Capital Markets, puts it: "High inventories and weak market fundamentals might eventually weigh on markets and push prices lower."

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