Sep 2, 2011|
Oil prices - What next?
Perhaps no other commodity generates as much interest as crude oil. The strength of crude prices left everyone aghast in the recent past. The driving events were unrest in Middle East and North Africa, OPEC inertia to raise output and most importantly, the oil speculations.
And then happened an event that bucked the trend. The U.S and European debt crisis eased the stub born price rise. It didnít take long for the ripple effect to pass through. Within a month, the demand in the U.S has slowed down leading to a rise in the crude oil inventory. This, along with expectation of resumed oil supply from Libya, has in turn pulled down crude prices in a way that they witnessed biggest fall since the month of May. However, knowing the notoriety of oil prices, will it be sensible to expect this trend to stay?
By simple law of economics, the oil prices should just depend on demand and supply. But unfortunately, the speculations take the better of them, especially in future markets. The same led us to witness the level of US$ 147 a barrel in the year 2008.
Oil prices are a play of multitude of factors. And quantifying the effect of each is impractical. However, amongst the current set, we will try here to assess some of the impacts of major recent events.
One might expect the recent downgrade of U.S debt to cause a global economic slowdown which could translate into lower fuel demand. Speculative impacts apart; we believe that the downgrade of U.S will have a negative long term impact on dollar. And one of the impacts of weaker dollar should be higher oil prices (beacause oil prices are quoted in terms of USD).
One may argue for a downward pressure on oil prices in the near future on account of slowdown in U.S and Europe, a break from Libyan crisis and OPECís assurance to increase oil supply along with the release of emergency oil reserves. However, there are other factors working in the favor of strong prices.
We expect oil prices to receive support from geopolitical tensions recently sparked by Israel and Iran, which are two of the major key oil producers. Last but not the least, there is an obvious tightness as far as demand and supply dynamics are concerned. The outlook for major emerging economies like India and China is still positive, which will be the key sources of global economic growth and the demand for oil from them is expected to be strong. Hence, we expect the recent slide in oil prices to be temporary.
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