Another view on rising oil prices

Oil rig right.jpgCrude oil prices are now up 18% since the US Fed announced its QE2 Lifeboat policy at the end of August. This clearly justifies the blog’s faith in the ‘triangle pattern’ in September. The rise is mainly due to financial players, with the Large Speculators dominating the buy-side on the futures markets.

But in turn, average US gasoline prices have now moved back over $3/gal, nearly double their lows in December 2008. And this highlights the key question, of whether the world economy can really prosper with oil prices at the $90/bbl level?

The evidence from history, in both 1979-80 and 2007-8, is that it can’t. But there has been a suggestion recently that ‘this time it is different’ because demand has been growing quite strongly in Asia in recent months.

However, veteran crude oil market watcher Ed Morse of Credit Suisse has a different view. He suggests we have seen “a series of one-off reinforcing factors that, coupled with winter seasonality, have tightened product and crude oil markets“:

• The Q3 heatwave in Japan and S Korea, which led to higher electricity demand for air conditioning
• China has shut 1355 coal mines to curb pollution, causing factories to run diesel generators instead
• Europe is having one of its coldest-ever November/Decembers, also increasing heating and fuel oil demand

None of these factors, sadly, are indicators of economic growth. Instead, with China poised for further interest rate rises, to cool inflation, the risk of slower economic growth there is clearly rising.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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