Oil Market Overview: Crude's Up—but Why?

The oil market went through a bit of a balancing act Tuesday after Nymex-traded crude settled Monday at its highest level since November.

But that surge in oil prices to over $54 a barrel was based on what exactly? The recent stock market rally on hopes that the economy is "less worse" than some had feared? Or is it investors regaining their appetite for risk and moving away from the dollar? Well, today stocks are taking a breather from their upward trajectory, and the dollar index is slightly firmer. Now it's time to regroup and rethink oil's rise.

Traders are looking ahead to oil market fundamentals—namely, the weekly U.S. inventory data. Supply and demand dynamics don't seem to count for much these days, although it seems we're nearly swimming in crude oil. U.S. oil supplies are expected to have risen again this week—the 10th week in a row. Platts survey of analysts suggest oil supplies rose by 2.2 million barrels last week. Oil inventories are already at their highest level since 1990 and are 18 percent above where they were this time a year ago.

When will demand pick up enough to offset that amount of oversupply? Fed Chairman Bernanke is talking about an economic rebound later this year—but for now Americans are seriously hurting.

Mike Fitzpatrick of MF Global picked up on this depressing nugget in his note to clients this morning: The Department of Agriculture says food stamp enrollment set a record for the third month in a row in February (the most recent month available). One out of 10 Americans received food stamps. With the unemployment rate at 8.5 percent in March, and expected to have jumped to 9 percent in April, consumers' energy use—and that of their employers—will likely decline not rise.

So again, what justifies oil's recent rally?