Voicing interventionist sentiments, James Williams, of WTRG Economics, said that, “We had another week of uncertainty, with oil trading more as a currency and inflation hedge than based upon the fundamentals … This will continue to be the case as long as the long-only index funds are allowed free rein in the futures market.”

On the supply side, said it expects global oil demand to grow to 86.88 million barrels per day for 2008, down from the estimate of 86.95 million it forecast in its May report.

OPEC knows that their “ability to increase production over the entire organization is severely limited, if possible at all, so by backing down their demand outlook, they have no reason to have to get into the debate on why they shouldn’t be increasing their supply,” said Neal Ryan, of Ryan Oil & Gas Partners.

Source: Crude Backs Down

Trichet’s comments were seen as the driving factor.

“Profit taking and/or selling in the crude market over the past week came to sudden halt and buyers stepped back to the plate based on these inflationary comments out of Europe,” wrote Thomas Hartmann, an analyst at Altavest Worldwide Trading.

But there was a technical aspect, too. “The price advance in crude futures accelerated after breaking yesterday’s highs, likely setting off a round of frenzied buying in the last hour of trading,” Hartmann added.

And James Williams, of WTRG Economics, sees “a market divorced from fundamental supply and demand … The decline in the dollar on the possibility of higher European interest rates only explains about 1/4th of [yesterday’s] move,” Williams wrote.

Source: Crude Takes Back Lost Ground – Buying Frenzy Develops Late in Day

The day’s action was more than a bit counterintuitive, since the Energy Information Administration’s weekly inventory report had crude supplies plummeting by 8.8 million barrels for the week ended May 23, the biggest drop since 2004. Analysts were looking for a 750,000 barrel gain in stocks.

However, “Lower oil stocks were due to problems offloading oil in the Gulf of Mexico, and this week’s deficit will show up in next week’s report as the tankers offshore are unloaded,” wrote James Williams of WTRG Economics.

Meanwhile, the Commodity Futures Trading Commission said that it started a wide-ranging investigation of U.S. oil markets six months ago, with a focus on possible price manipulation. The CFTC said it took the unusual step of publicizing the probe “because of today’s unprecedented market conditions.”

In OPEC news, the United Arab Emirates says that current crude prices are going too fast too high, according to a Reuters news report Thursday, and that the UAE is “willing and well prepared” to raise output if there is a supply shortage, according to the report. And Indonesia, struggling to keep up with its oil production quotas within OPEC, said it will withdraw from the cartel by the end of the year.

Source: Crude Beats a Retreat – Drop Comes Despite Huge Inventory Plunge

June reformulated gasoline gained a penny, to $3.13/gallon.

The Energy Information Administration released its weekly inventory report yesterday, and it showed crude supplies climbing for the third straight week, up 5.7 million barrels for the week ended May 2. The three-week build is now nearly 12 million barrels.

Gasoline supplies rose 800,000 barrels, the EIA said, while distillate stocks were down 100,000 barrels. Refinery utilization fell to 85.0% of capacity from 85.4% a week earlier.

“This report is bearish, although it remains uncertain how much [it] will influence prices given the ebullient sentiment in the oil market,” wrote Chris Lafakis, of Moody’s Economy.com.

“It will be hard for the bulls to put horns on this bearish report,” said James Williams, of WTRG Economics, and he wryly suggested that “maybe we ought to call this the Goldman effect,” referring to Goldman Sachs’ projection for a $150-200/barrel oil price in the near future.

The causes of rising oil prices “have been chronicled repeatedly here — demand from China and India, the falling dollar making oil an inflation hedge, speculation, OPEC supply restraints, supply threats in Iran, Iraq and Nigeria, and refinery bottlenecks in the U.S.,” summarized John Kilduff, of MF Global.

Unlike gold, which has yet even to approach its alltime inflation-adjusted high, oil is now well “above the $101.70 peak hit in April 1980, the year after the Iranian revolution,” said Kilduff.

“Now we are in unexplored territory,” Kilduff said. “Add to it, the significant recent supply disruptions in Nigeria and additional inflationary pressures that surely must be the result of a loose monetary policy and the path of least resistance is higher still for energy markets.”

“Spare oil capacity is also a large factor for the rise in prices,” wrote James Williams, of WTRG Economics. “Spare capacity is limited — under 2 million barrels per day, which means the oil production industry is at about 97% utilization.”