What drives oil prices and where are they headed? According to one analyst, traditional institutional funds and hedge funds are the big drivers today of oil prices, and unfortunately for the industry, those prices may be headed for the mid-$50s at best. In a recent report, Doug Leggate, integrated oils analyst for Citigroup in New York, says the increased dominance of funds as the incremental buyer of oil futures-accounting for more than 50% of the market-has induced greater technical traits to the market. "We therefore contend that if funds are technically driven, technical analysis (which charts previous long-term market trends to predict future market patterns) will become a key leading indicator of oil prices." To support this thesis, Leggate makes use of a proprietary, multi-factor correlation model that dissects the relative influence of the four main variables that have affected oil prices during the past decade: inventory levels, spare OPEC production capacity, refining margins, and open-contract interest in the futures market. For more on this, see the November issue of Oil and Gas Investor. For a subscription, call 713-260-6441.

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