The last ten days have been among the most volatile for the oil markets since Iraq invaded Kuwait 25 years ago. Early last week prices reached a six-year low on news that China’s economy was not doing so well and increases in global stockpiles — fairly solid evidence that the markets are oversupplied.  Starting last Thursday, the oil markets surged for three trading sessions, gaining some 27 percent, partly fueled by short covering and the feeling that prices had reached their low after a year-long price drop. Tuesday brought a reaction to the surge and an 8 percent price drop. Wednesday was unusually volatile swinging between a 4.8 percent loss and a 1.9 percent gain with prices finally ending higher – New York at $46.25 and London at $50.50. The consensus of observers is that oil markets currently are in an upswing with “momentum” carrying prices higher no matter what the fundamentals say.
 
The EIA reported that crude stocks increased by 4.7 million barrels last week as compared with analyst expectations of only a 100,000-barrel increase. Total commercial inventories were up by 5.7 million barrels. Much of the increase, however, was due to a surge in imports over the preceding week. Some analysts have been saying that much of the global overproduction of crude is ending up in the US as that is where the storage capacity is located. Traders seemed more impressed that crude stocks at Cushing, Okla. fell by 400,000 barrels last week than the 4.7-million-barrel nationwide increase.
 
In addition to the increase in stockpiles and the continuing economic problems in China, the announcement that President Obama now has the votes to overcome a Congressional effort to torpedo the Iranian nuclear agreement improved the prospects for more Iranian oil coming onto the market in 2016. This could easily overcome any projected drop in US shale oil production and keep prices low for another year or so.
 
The 27 percent price jump, despite fundamentals saying it shouldn’t be happening, has many observers struggling to make sense of what is going on. The best explanation seems to be a massive overreaction to some normally minor developments such as higher stock markets; pipeline problems in Nigeria; new data showing that US shale oil production is slipping a bit, as everybody already knew; and an OPEC editorial saying how nice it would be for its members if prices were higher. Conventional wisdom continues to say the the price surge is totally detached from reality and that fundamentals say prices should still be falling.
 
Vitol, the world’s largest independent oil trader, expects that oil prices will stay between $40 and $60 a barrel next year. A few people are still saying that we could see oil below $30 before the year is out, given the current fundamentals. The US is about to enter the season when refineries go into maintenance and demand for crude traditionally drops.
 
The news from China is almost universally bad with factory indicies showing new signs of economic weakness. Beijing is still grappling with how to keep its stock markets from collapsing in the face of increasing bad news. The latest effort involves severe pressure and even threats to Chinese traders who try to short the market or sell too much stock. Several Chicness financial journalists seem to be in jail for suggesting that the economy is not doing too well and that stock prices might be going down.