China's confidence in Europe boosted heating oil prices on Thursday. (image: Nicholas Whitaker for HeatingOil.com)

Oil prices surged yesterday after China denied reports that it was considering cutting its holdings of European bonds. This show of confidence in the fragile European economy emboldened investors in stock markets and commodity markets across the globe. Spain’s announcement of budget cuts gave more weight to the opinion that Europe’s debt crisis would not stand in the way of economic recovery. Because oil demand is so closely linked to the performance of the economy as a whole, this positive sentiment had a strong impact on oil prices. The rebound of crude oil and heating oil prices was especially strong because prices had fallen so far in recent weeks. Despite this week’s increases, oil prices remain far from the high points reached at the beginning of May.

Today’s average retail heating oil price in the Northeast is 8 cents higher than Thursday’s average price.

Heating oil prices fell due to Europe's debt crisis. (image: Nicholas Whitaker for HeatingOil.com)

Europe’s debt crisis continued to weigh on oil prices on Thursday, affecting both the fundamentals and oil’s appeal as a financial investment. Regarding oil fundamentals, the debt that threatens to bring down the economies of Greece, Spain, and Portugal will also constrain economic recovery in Europe. Slower economic recovery will keep Europe’s demand for oil at its current depressed level, and that has pressured oil prices to fall. On the financial side, Europe’s debt has weakened the euro, giving the dollar a boost relative to the European currency. Since crude oil futures and heating oil futures are priced in dollars, a stronger dollar makes them more expensive for traders who hold other currencies, diminishing their appeal.

Today’s average retail heating oil price in the Northeast is 2 cents lower than Thursday’s average price.

The price of heating oil has plunged and rebounded as Europe forms a bailout package for Greece. (image: Nicholas Whitaker for HeatingOil.com)

Crude oil prices fell last week by the largest weekly decline in 16 months, with heating oil prices dropping rapidly as well. The primary cause was Greek’s debt crisis, which threatened to endanger the European currency and bring down other economies within the Euro zone. However, on Monday European leaders agreed to a staggering $1 trillion bailout package for Greece, which jolted global stock markets and led to a spike in oil prices. Though the price of heating oil fell by a penny on Friday, prices increased by 7 cents as of 9:00 am in response to rebounding oil prices.

Today’s average retail heating oil price in the Northeast is 6 cents higher than Friday’s average price.

Signs of economic recovery lifted oil prices on Friday. (image: Nicholas Whitaker for HeatingOil.com)

Positive economic news in the US on Friday boosted stock markets and oil prices. Sales of new homes in the US jumped unexpectedly, posting the largest monthly gain in five years. Orders for capital equipment rose, indicating that businesses are rebuilding in anticipation of economic growth. For oil traders, these signs of economic recovery equate to signs of revived oil demand, which is expected to grow hand-in-hand with the economy as a whole. Economic indicators have exercised far more influence over oil prices than the fundamentals of supply and demand; supplies remain abundant, and continue to suggest to some traders that oil prices cannot be sustained at their current levels.

Today’s average retail heating oil price in the Northeast is 4 cents higher than Friday’s average price.

Exxon CEO Rex Tillerson is concerned that high oil prices could hurt the economy and lead to demand destruction. (image: arabianoilandgas.com)

While the rising price of crude oil has spawned a vigorous debate over the impact of speculation on oil prices, seasoned observers of oil markets appear to have reached consensus on another question: high oil prices threaten economic recovery. Representatives of the IEA, OPEC, and other economists and oil consultants have all worried that rising oil prices will curb consumer spending on other goods and impede the global economy’s tentative recovery.

Now the Houston Chronicle has reported that Rex Tillerson, the CEO of Exxon Mobil, has joined the club:

As oil prices move upward, they begin to become adverse for the national economy and adverse for some big pieces of the state economy for sure.

For Tillerson, the danger comes when gasoline prices hit $3.00–$3.50 a gallon. At that point consumers begin to change their behavior in order to reduce their energy demand. While changes in consumption can have “a detrimental effect” on the entire economy, Tillerson also worried that high prices pose a long-term threat to the oil industry through demand destruction, the permanent reduction of demand.

The other analysts cited above have cautioned that crude oil prices above $100 a barrel could halt the recovery, and that prices above $80—which happened in the fall, and has been the case for nearly all of March and April—are slowing the burgeoning recovery.

While many consider high prices the result of speculation, and the Senate gets set to debate financial reform that would curb speculation, Tillerson believes the solution to higher prices is to encourage investment and not to “over-regulate” the oil and gas industry.

Oil prices climbed as flights resumed in Europe. (image: Nicholas Whitaker for HeatingOil.com)

Six days after a volcanic eruption closed Europe’s airspace and virtually eliminated the continent’s demand for jet fuel, flights resumed in some part of Europe. As restrictions ease and travel returns to normal, fuel demand will likewise return to normal, and that prospect has lifted the prices of crude and heating oil. Quarterly earnings reports from US companies—including Goldman Sachs, the target of an SEC lawsuit—have helped boost stock markets, giving further support to oil prices.

As of 12:00 pm, the average retail heating oil price in the Northeast is 3 cents higher than this morning’s average price.