4 issues driving today’s oil price

Currencies, Economic growth, Financial Events, Oil markets

oilfeb.bmp

Quietly, oil has moved back to the $100/bbl level.

This is quite different from January, when it first hit the magic $100/bbl number. Financial players had jumped on the trend from November as crude rose above $80/bbl, and then wanted to ‘get out at the top’. Their thinking was that a US recession would reduce demand for oil, and so prices would fall. Now, however, more fundamental forces seem to be taking prices higher, and causing the ‘shorts’ to cover their positions.

The problem for the chemicals industry is that this purely speculative behaviour creates additional volatility. And with $120bn already ‘invested’ by financial players in commodities, much of it in oil, companies must assume that ‘speculative volatility’ will increase.

The behaviour of financial players is not the only uncertainty currently driving oil prices. Apart from the impact of geo-political issues such as Iran, Nigeria and Venezuela, four key questions will influence the direction of oil prices in 2008:

Does OPEC care that higher oil prices will damage the western economy? In the past, the answer would have been ‘yes’, but recent signs (their decision to ignore President Bush’s plea for lower prices last month) imply their thinking may have changed.
Can net non-OPEC supply increase as much as expected this year? Production from existing fields in Mexico and the N Sea has recently been decreasing faster than expected. This means more new oil has to be produced, to make up the difference.
Will Asian and OPEC countries continue to subsidise oil products? If they do, then higher world prices will have no effect on the countries where fastest demand growth is taking place.
Will financial players and pension funds see oil as a hedge against a falling US$? Some are already viewing the ‘US recession’ argument from a different angle, and believe it will force the Fed to cut interest rates back to 1%, causing the US$ to fall further.

The downturn in the global economy has been impacting chemical margins since the summer. Profits have been hit, as key customer industries such as housing, autos, and retail became more price conscious. Demand has also been slowing, as higher oil prices acted as a tax on Western consumption. Now feedstock volatility is likely to increase, due to the growing influence of financial players. CEOs and CFOs therefore need to ensure that proper risk management tools are in place to protect margins.

PREVIOUS POST

The law of unintended consequences

19/02/2008

There’s an interesting article on Bloomberg, suggesting that the US Fed’s dr...

Learn more
NEXT POST

BASF – the oil and gas company

24/02/2008

BASF Chairman Jürgen Hambrecht sounded confident last week, following their ann...

Learn more
More posts
Global chemical industry – key trends for success in today’s New Normal
02/08/2020

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...

Read
Oil prices signal potential end to the V-shaped recovery myth
26/07/2020

Oil prices have moved into another ‘flag shape’ – which previously provided critic...

Read
Bankruptcies now the key risk as hopes for V-shaped recovery disappear
19/07/2020

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would ...

Read
Merkel warns of need to prepare for No Deal Brexit
05/07/2020

Most people missed the fact that last Tuesday was the last possible date to delay the UK’s exi...

Read
Oil prices start to reconnect with coal and gas
21/06/2020

Oil prices are finally starting to reconnect with other fossil fuel prices, as the chart shows.  It...

Read
Economic risks rise as the lockdowns end
14/06/2020

It is now 13 years since I wrote the first post here, in June 2007. A lot has happened since then: ...

Read
World moves from Denial to Anger, as the Paradigm of Loss moves forward
07/06/2020

I have been warning about the Covid-19 risk since early February, and in April suggested here that: ...

Read
The New Normal for global industry
31/05/2020

The global chemical industry is the third largest sector in the world behind agriculture and energy,...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more