Oil prices moved above $60 a barrel earlier in the day, but where unable to maintain their gains and have since dropped below the psychological $60 barrier once again.

Earlier this year oil had been making steady gains as investors bet on an economic recovery occurring in the second half of this year, but we are now in the second half of the year and a recovery is nowhere in sight. As a result, traders have started to focus more on the underlying fundamentals for oil, and this has led to a pretty steep sell off over the past couple of weeks.

While I was not a finance major in college, I do know a few things about supply and demand. If there is ample supply and lower demand, prices should be low. If there is limited supply and high demand, prices should be high. I guess oil investors never really studied supply and demand economics.

Black gold is higher in European trading, as investors believe that the U.S. recession may have bottomed. Such a bottom could signal rising demand, which is enough for beleaguered black gold investors. In fact, Gerard Rigby from Fuel First Consulting in Sydney, Australia, noted, "The feeling is we've seen the worst of it, and the only way now is up . . . Some of this is also a trading momentum play."

For those that had the fortitude to pull the trigger, shorting crude back in early July when all the perfect storm conditions for $200 per barrel oil were on the horizon ... and had the stones to stay with that trade ... made a killing.

This is one of the greatest reversals for any major market of any kind that has ever occurred. And it clearly shows how the crude oil market was being manipulated by speculators and hedge funds.

The impact was fatal for hundreds of small airlines and small- to medium-sized trucking companies, along with thousands of other companies that didn't hedge against the price explosion in energy.

The price of crude, which topped out at $147 per barrel in July 2008, crashed to $35 per barrel by Dec. 18 -- a 76% haircut -- before getting a bid that got the price back above $40 on the eye-popping headline that OPEC would slash daily production by 4.2 million barrels.

This oil trade takes the cake.

At the zenith of the speculative bubble in the oil patch -- when crude hit $147 per barrel in July -- you had everyone from T. Boone Pickens to Prince Alaweed touting $200-per-barrel oil by the end of the year.

Crude is now trading around $40 -- down $107 per barrel in less than six months. Unbelievable!

And this latest drop comes after OPEC voted to cut daily production by an eye-popping 4.2 billion barrels per day.

Looks like the world is awash in crude oil.

Needless to say, those euphoric longs in the oil stocks got destroyed. Most energy stocks lost 50% to 70% of their value during the course of the sell-off in crude.

And remember those television commercials with T. Boone and Chesapeake Energy (NYSE: CHK) CEO Aubrey McClendon pushing for the expansion of natural gas?

Well, natural gas prices are down 60% from their mid-year highs.

If you put money into T. Boone's Clean Energy Fuels Corp. (NASDAQ: CLNE) as recently as September, when the stock was trading at $20, you now own Mr. Pickens' vision for $5.

Oil has gotten as low as $94 today. That is down from an all-time high of $147. Yesterday, crude sold down almost $10.

There is a case to be made that oil has much further to fall.

The first part of the argument is fairly simple. As the economy is crushed in the US and EU, demand for fuel and petrochemicals falls through the floor. Demand for China's exports also falls because consumers shut down their buying of everything but the essentials. China's need for crude drops as well.

Under those circumstances, if OPEC does not sharply decrease supply, oil will almost certainly move down by at least a modest amount.

But speculation may have just as great an effect. No one was able to fix a number on how much speculators helped drive crude prices up earlier this year. They had a role in it, and some government agencies and Congressional staffers think oil may not have ever moved above $120 without a push from those trying to make money on artificial price inflation.

Speculation cuts two ways. If those buying futures begin to gamble that oil will move down and if they begin to short crude, the downward push on oil could become significant.

Speculators may have done a lot to hurt the economy by pushing oil prices up. Now, perhaps they can do some good pushing prices down and make a ton of money in the process.

Douglas A. McIntyre is an editor at 247wallst.com.

Economists think they have most of the data they need to forecast the price of oil: The dollar is rising; consumption in the US is falling; production out of OPEC is steady; the drop in crude has driven many speculators out of the game; unrest is receding in Nigeria and Venezuela; huge deposits have been found off Brazil; the hurricane season in the Gulf of Mexico has not disrupted production.

War is harder to predict, but there it is in Georgia. Russia seems intent on destroying the military of its small neighbor state. The U.S. is pushing to keep Russia from escalating the conflict, which is driving extreme tension between Russia and NATO. Russia is an important supplier of crude, and it could decide to use that as leverage to keep the West out of the dust up.

There is some speculation that the Russian government would like to cripple other countries that share it borders to build a geographic "buffer" to its south. NATO may be forced to step in because some of these countries are close to its members' territories.

War is hard to predict and the oil market does not like the unpredictable. Oil prices are about to rise and could get much higher.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Minyanville's top dog, Todd Harrison, dares to ask in public what Wall Street types quietly consider in private. For more insight and ideas, visit

www.Minyanville.com

A few Random Thoughts on the action in crude:

• A finski (a $5 bill) ain't what it used to be - a 10% move at the beginning of last year. Now it's barely 4%.
  
  

• While I've been bearish on crude through the lens of deflation -- and I continue to believe all roads lead there -- "pure trading eyes" sees the sideways action for the last month.
  
  

• United States Oil Fund (AMEX: USO) $104-$113 are the parameters to watch (filling of the gaps versus upside breakout). You can drive a truck through that, I know, but I don't make the rules, I just try to play by them.
  
  

• Hands over eyes, sideways movement under resistance is a bearish churn. The same movement above support is a bullish base.
  
  

• My current position? Flatter than a sat on hat. And I like it that way... For now.

R.P.

Position in USO

World leaders, hedge fund managers, and oil ministers are all in the Saudi kingdom trying to dope out why crude prices are so high. Early news out of the meeting is not good.

The head of Shell told Reuters that the meeting was a waste of time, saying "What I've heard so far are basically all good ideas, but it will probably not change the price tomorrow morning."

The Saudis did day that they would increase oil production.

The summit is a fine example of how too many cooks spoil the soup. Investors have a different agenda from the oil companies. The oil companies have a different agency from the exporters.

The importers just want lower prices.

Douglas A. McIntyre is an editor at 247wallst.com.

Minyanville's top dog, Todd Harrison, dares to ask in public what Wall Street types quietly consider in private. For more insight and ideas, visit www.Minyanville.com.

• If the next generation Apple (AAPL) iPhone is effectively a handheld computer, is the personal computer space a place to poke on the short side?

• What's the franchise value for Sun Microsystems (SUNW, er, JAVA)?
  
  
• Maybe that's the problem. In this ADD, immediate gratification world, perhaps folks don't remember that JAVA used to be SUNW?
  
  
Woah. Nelly?


Given that funky looking Gold Fields (GFI) chart, should I stress that I'm playing name through defined risk calls?


• In addition to the note that when I unwind my short crude I'm goning to sneak out of my long metal play, too?
  
  
• While I grabbed some tertiary financial exposure this morning, why is "Good traders know how to make money while great traders know how to take a loss" repeating in my keppe as I watch the action and overhang in Lehman (LEH)?
  
  
• Speaking of ticker symbols with G's in the front and I's behind, when do I revisit Gannett (GCI), which I pared nicely above $30 and kept some for the thesis?
  
  
Speaking of pairs, how do I get long Jo, short Blair?


R.P.

Positions in LEH, GFI, GCI

Earlier today oil prices had traded higher, as traders were betting that this past weekend's wintry weather would put a crimp in heating oil supplies. Since then, though, oil prices since turned to the downside, dipping under the psychological $90 barrier.

The main reason why oil prices have been falling today? You guessed it ... concerns over the health of the overall economy. Today's concerns are a runoff of last Friday's CPI report, which showed that inflation during the month of November was the highest that the economy had seen in the past two years. This sent the market tumbling to close out last week, and the bears have only continued to push down the market again today.

There has been a growing fear over the past year that the U.S. economy was moving full steam ahead towards a recession. The one thing that has provided some hope was the anticipation that the Federal Reserve would be willing to continue to slash interest rates in order to fuel economic activity and fight off any looming recession.

Once gain, oil traders are saying oil is overbought, short-term, and once again, oil moves toward the stratosphere.

Oil gained 95 cents to $97.25 Wednesday, touching $98.62 earlier, after the U.S. Energy Department reported that U.S. crude oil inventories fell by 821,000 barrels for the week ending November 2, and on temporary oil production shutdowns in the North Sea. In addition, heating oil gained 2.62 cents to $2.6295 and unleaded regular gasoline rose 1.77 cents to $2.4470.

BP Plc (NYSE: BP) and ConocoPhilips (NYSE: COP) said they plan to curb output in the North Sea starting Wednesday night before storms batter the area, Bloomberg News reported Wednesday. That only added to traders' jitters regarding the U.S. market's ability to remain well-supplied heading into the Northern Hemisphere's winter.

"Globally, oil markets are well supplied, but for the U.S., anything, a North Sea shutdown, a cold snap in the northeast, can send oil up another $2 or $3," one oil trader said to BloggingStocks. "The market has discounted $100 and $110 looks like the next target."

Vicious circle

Further, the oil market, in addition to a geopolitical premium and a trader/speculator premium, is now being plagued by a "vicious circle" involving the dollar and oil, according to Jim Dietz, an independent energy trader.

Oil prices have once again set a new record today, with prices moving as high as $97 a barrel earlier in the session, and are currently trading up $2.73 to $96.63.

Today's move comes as traders are becoming increasingly worried about supply concerns as winter weather has finally started moving across the Northern Hemisphere. So far this year, mother nature has spared us from onslaught of wintry weather, but now that is changing, and the market is reacting. The past two weeks we have seen greater than expected declines in crude inventories in America, and analysts are expecting even more drops to be announced tomorrow when the Department of Energy releases its weekly inventory report.

Analysts are expecting to see a drop of 1.6 million barrels, and if we get reports of anything greater than that I would not be surprised at all to be sitting here writing about oil at $100 before the week is out. Consider this, before last week's report, prices were trading down to around $90.50, so a move from current prices to the psychological $100 barrier is not by no means out of the question.

ExxonMobil (NYSE: XOM) implied volatility near average as oil trades above $82.

XOM closed at $91.76. Crude oil futures were up 0.79% to $82.15 according to Bloomberg. XOM overall option implied volatility of 26 is near its 26-week average of 24 according to Track Data, suggesting non-directional price fluctuations.

Chevron (NYSE: CVX) implied volatility near average as oil trades above $82.

CVX is an integrated energy company with a market cap of $198 billion and quarterly June 2007 revenue of $56 billion. CVX closed at $93.34. Crude oil futures are up 0.79% to $82.15 according to Bloomberg. CVX overall option implied volatility of 25 is near its 26-week average according to Track Data, suggesting non-directional risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Newmont Mining (NYSE: NEM) implied volatility elevated as Gold above $718.

NEM, the world's largest non-hedged gold producer, closed at $45.16. Gold is at $718.80 according to Bloomberg. NEM overall option implied volatility of 34 is above its 26-week average of 29 according to Track Data, suggesting larger price risks.

PetroChina (NYSE: PTR) volatility elevated at 38 as Warren Buffett reduces stake.

PTR, a Peoples Republic of China run petroleum and natural gas company, closed at $145.05. Dow Jones reported that Warren Buffett's Berkshire Hathaway reduced its stake in PTR to 9.72% from 10.16%. WTI Crude oil futures are down 0.03% a $78.21 a barrel according to Bloomberg. PTR overall option implied volatility of 38 is above its 26-week average option implied volatility of 30 according to Track Data, suggesting larger price risk.

Volatility Index S&P 500 Options-VIX at 25.27; 10-day moving average is 24.87.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

An unknown group has blown up several oil pipelines in Mexico. They must use bicycles, because soon they will not be able to afford gasoline. OPEC members have indicated that if they raise oil production it will be by a very small amount.

Oil prices eventually affect prices for gas, jet fuel, and a number of petrochemicals used to make commodities as widely used as plastic. And, there is increasing evidence that oil prices are not only getting higher, but could stay high.

Part of the increase in oil is based on panic, fear that an event could cause a spike in price. But sustained high prices are based on several geopolitical realities that may not go away.

The oil industry in Venezuela has been nationalized. Whether the country can support the infrastructure to keep its oil production high is an open question. Other oil producing countries like Nigeria face considerable unrest and civil war. An OPEC decision to keep production at current levels would only add to these.

The mortgage crisis and future reset of variable rate home loans will almost certainly continue to drive down home prices and increase defaults. High oil prices will hurt car sales, retail sales, and airlines. And that list grows the higher fuel prices move.

Eighty dollar oil may make the OPEC members better off, for now. But, they could tip the US into recession.

Douglas A. McIntyre is a partner at 24/7 Wall St.