Wednesday, September 12, 2007

Oil Hits $80 Per Barrel

Yet another all-time high for the CRB Futures index today, as it rises another 0.8% to 428.83, now putting it more comfortably above the July 19 peak.

Leading the way is the arguably single most important commodity, oil, which briefly rose above the $80 level, while closing up 2.2% at a new all time high for closing prices, at $79.91.

Just like in 2006, oil prices reached a peak at $78 per barrel during early August. The big difference is that high oil prices have proven a lot more sustainable this time around, something I predicted. That forecast was made because the reasons for the bull market in oil wer much more sustainable late July/early August this time than in 2006. In 2006 it was based on fear of supply disruptions due to a Katrina-like hurricane in the Mexican gulf, or a U.S.-Iranian war in the Persian gulf. This time sharp increases in demand from particularly China and India has pushed up prices. Also helping to push up the dollar price of oil is the weak dollar, which hit a new all-time low against the euro today, and a 13-year low against the yuan. A weaker dollar means that the incentives to increase production or reduce consumption are a lot weaker than the dollar price of oil would suggest.

Responsible for the most recent surge in oil is in part the recent acceleration in monetary growth, which as one could expect, first and foremost bids up commodity prices.

And of course, the Energy Information Administration's statistics today showing a sharp drop in oil inventories also helped a great deal. Oil inventories are now below last year's level after having exceeded year ago levels for most of 2007. And more importantly, the inventories of two of the products produced by oil-gasoline and heating oil are far below last year's levels. Gasoline inventories are down 8% from last year's level and are now at an all-time low -or at least for as long as statistics has been compiled- relative to demand.

So oil should remain high, and probably go even higher, if the Fed inflates as much as it seems likely to do. A downside risk would be a unusually mild winter, which would depress heating oil demand. An upside risk would on the other hand be an unusually cold winter. Not to mention of course the possibility of other supply disruptions, like Middle East wars.


Anonymous Anonymous said...

Suppose the US economy goes into a recession and does not recover anytime too soon, say, a year. What will the implications be on the USD and what will happen to all the USD that China for eg, is holding?

10:28 AM  
Blogger stefankarlsson said...

Well, the USD will certainly fall as the Fed lowers interest rates and U.S. stocks appear less appealing.

China will probably hold on to their USD and in fact continue to buy more, even though this means that they will make big losses. The reason is a false belief that it wouldn't be in their self-interest for the dollar to fall significantly against the yuan, something it will do unless they continue to accumulate more USD.

11:42 AM  

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