Good news for oil?

I've had my amateur economist hat on for a couple of weeks now, trying to figure out exactly why oil prices are so high. Yes, demand is up, but so is supply. When you break down the components of demand, it seems that consumer demand is driving a portion of the high prices right now, but speculative demand is over inflating prices. Some professional economists seem to agree:

But the crack spreads, or price differences between gasoline and crude and heating oil and crude, "were higher than justified by the refinery problems, especially when you consider that the contract is for September delivery when the summer driving season has come to an end," he said.

All in all, the "aura of invincibility is really all the bulls have going for them," said Tim Evans, a senior analyst at IFR Markets.

Traders are "hoping to prevent a correction from taking hold because "if the prices weaken, then someone might notice how very well supplied these markets actually are," he said in an afternoon note to clients.

If we see a correction, this article from 2004 suggests that the slide in oil prices could be a steep one.

Liquidation of speculative contracts. The current high degree of speculation in oil markets suggests that any price weakness will feed on itself. Speculative traders tend to be driven by price momentum. Thus any break in the oil price should trigger liquidation of large speculativecontracts. That, in turn, should lead to even lower prices.

So hold out hope that relief is on the horizon.

disclaimer: Jib is not an economist, but he does stay at Holiday Inn Expresses.