Oil Tops $110, Defying Fundamentals

It's certainly a new day in the oil markets when crude supplies can rise more than four times expectations, gasoline inventories have run up to their highest level in about 15 years -- and we're in the midst of a serious economic slowdown -- yet oil prices surge to a new all-time high of $110.20 per barrel on the Nymex floor.

As a trader told me at the close, "what if we drew?" -- so what if oil and gasoline supplies had declined? "Fundamentals just don't matter," he said.

MF Global energy analyst Mike Fitzpatrick agrees: "Whatever traditional paradigm used to exist for analysis has gone out the window" ...at least for now. The big driver for oil prices isn't U.S. supply vs. demand. It's all about the dollar.

The dollar moved to another all-time low against the euro. "The dollar has been annihilated today and that's definitely bullish for (oil) prices," says trader Ray Carbone of Paramount Options. Add to that the fact that front-month crude options will expire on Friday.

"For the past few months, we've seen explosive rallies into crude options expiration," Carbone says. "There's a lot of open interest at the $110 strike price," so hitting that mark seemed inevitable.

Also, look at the crude curve, which tells a painful story -- for shorts and consumers -- about how high oil prices might go. Prices have averaged $95/barrel this year -- and are over $105 a barrel through July. The front month spread has been moving further and further out along the curve for the past week.

Joe Terranova, director of trading at MBF Clearing, says the April/May spread is critical and oil prices are unlikely to pull back until the April futures contract expires next Wednesday.

Oil bulls are making huge bucks on these moves. We can guess the shorts that are in this market -- and those who thought today's bearish EIA data would send prices in a downward direction -- are getting squeezed.

But real pain is already being felt by regular folks: The average retail price for gasoline is at a record $3.25/gallon. The American consumer could buy about 9.3 gallons of gasoline per hour worked five years ago -- but less than 6 gallons today, according to figures from A.G. Edwards. Many residents in Alabama, Mississippi, and Kentucky are spending 10 percent or more of their monthly income filling up their gas tanks -- and it could get worse.

Terranova says, "You'll see a run towards $4 based on the front of the board. If oil goes north of $110, you'll be staring at $4 at the pump. Absolutely."

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