SINGAPORE (Reuters) - Current oil prices are the result of financial market gyrations and do not reflect the supply-demand dynamics of the physical market, energy consultant and prize-winning author Daniel Yergin said on Monday.

Crude oil benchmarks are holding near $80 a barrel, having doubled from under $40 at the end of last year, after plunging during the financial crisis from all-time highs. But bulging inventories are keeping gains in check.

“Oil prices today do not reflect the world’s supply and demand fundamentals. Instead, prices are reflective of the weak dollar and expectations of a strong economic recovery,” Yergin told reporters on the sidelines of a conference.

On Monday, oil clawed back some of last week’s 1.4 percent losses to above $77 a barrel, driven up by a weaker dollar and improved sentiment over the economic outlook. <O/R>

U.S. crude rose to its highest this year at $82 on October 21 and rebounded nearly 73 percent so far this year, also helped by rallying equity markets. It turned positive on a rolling 12-month basis in the middle of last month for the first time since October 2008, raising the risk of commodity-led inflation.

“We’re going to see this interplay between oil as a physical commodity and oil as a financial instrument,” said Yergin who bagged the Pulitzer Prize for “The Prize: An Epic Quest for Oil, Money and Power,” an 800-page history of the global oil industry.

But further upside for oil could be limited, with U.S. data pointing to a choppy recovery, and crude inventories standing near multi-year highs in the United States, the world’s top energy consumer. <EIA/S>

Supply-demand fundamentals will direct the market at some point, Yergin said, a slight shift from his view in July when he said that such physical factors are beginning to reassert themselves again, after economic optimism pushed oil steadily higher in the first half of the year.

“The only two real characters that count are supply and demand. It might take a long time for these to make their voices heard. But they will win at the end of the day.”

Diesel and heating fuel in floating storages have risen this year to unprecedented levels as the global recession hammered demand, with hopes resting on a harsh winter in the West to help draw down the glut.

“The impact on high storage levels will be felt coming out of the winter,” Yergin said, but declined to forecast how long the glut would linger.

Ship brokers ICAP estimated that oil products now stored in floating vessels have risen to 90.3 million barrels, up nearly 15 million barrels from a previous estimate at end-October, and might rise by another 6.5 million barrels by year-end.

Nouriel Roubini, an economist noted for his early warning that the United States was headed for a housing bust and oil shock, said earlier this month that oil’s jump to $80 was unjustified, and a run to $100 might cause economic stress the way record highs near $150 did last year.