Crude hits record as US dollar slides
Crude oil rose to a record US$105.97 a barrel in New York on Thursday as the US dollar fell to its lowest level ever against the euro. Energy and metals prices have surged over the past year as the dollar plunged, prompting investors to seek a hedge against inflation. The Organization of Petroleum Exporting Countries refused to increase production targets Wednesday, saying the market has sufficient supply. "As long as the funds and other speculators are seeking returns from commodities that aren't available with bonds, equities or real estate, prices will stay high," said Addison Armstrong, director of market research at Tradition Energy. Crude oil for April delivery rose 95 cents, or 0.9%. Brent crude for April settlement rose 97 cents, or 1%, to $102.61 a barrel, a record close. Futures reached $102.95 a barrel Thursday, a record intraday price. "The oil market has completely left the realm of supply and demand," said Sarah Emerson, managing director of Energy Security Analysis. "Commodities have become just one more asset class for pension funds." The euro rose to a record against the dollar after European Central Bank president Jean-Claude Trichet said there is "strong upward pressure on inflation," signalling he's in no hurry to cut interest rates. The US Federal Reserve has cut the target rate for overnight loans between banks in the US by 2.25 percentage points since September. The ECB's reluctance to follow the Federal Reserve in lowering rates pushed the euro to a record $1.5378 Thursday. "Oil has become a financial vehicle for pension funds to hedge against inflation, terrorist attacks and events in countries like Venezuela and Iran," Emerson said. "OPEC was absolutely right - there's no problem with supply." The 13-nation producer group will hold its next scheduled meeting on Sept. 9.
The flood of speculative investment into oil markets is inflating a price bubble that could pop and send crude prices sharply lower if US petroleum demand continues to slump, analysts warned yesterday. The boom could be setting the stage for its own undoing, many analysts argue, since it is being fuelled by speculators looking to hedge against a declining US dollar and devalued financial assets. Some analysts are forecasting a sharp correction in the price of crude this spring. “It's hard to argue that prices should be higher [now] than they were not too long ago,” said Michael Lynch, president of Strategic Energy and Economic Research, who has forecast that crude markets are set for a massive correction that could eventually bring prices as low as $50 a barrel. “I think this is definitely a bubble because it is financial investors who are putting money into the market, not oil traders.” But others argue that oil prices are heavily influenced by non-market factors, and those factors could extend the crude rally. Unlike other recent bubbles – involving mortgage-backed securities or dot-com stocks, for example – the oil market is often driven by geopolitical concerns, from turmoil in the Middle East to the threat of a war involving Venezuela, by weather-related shocks and by the manipulations of a powerful production cartel that is determined to defend high prices. The stunning price rise has been driven almost exclusively by investors who were bailing out of the dollar and other financial assets and pouring into commodities, Judith Dwarkin, chief economist at Ross Smith Energy Group, said yesterday. “The fundamentals don't support prices at $80, let alone $100,” Dwarkin said. She said global demand growth has slowed in recent years, while spare capacity among members of OPEC has expanded somewhat, even as inventories of gasoline are at robust levels. “The greater prices diverge from what is fundamentally supportable, and the longer they stay at a distance from what is fundamentally supportable, the greater the risk of a correction, and a large one.” She has forecast an average price of $75 a barrel for this year.
(Calgary Herald, Globe and Mail 080307)
This roller coaster ride the oil futures market has been on over the past few months probably won't level out until it is official that the US is in a recession....and of course, the powers that be won't admit that until it is absolutely the last resort. What price oil will level out at is anybody's guess...I just wonder if this $105 bbl price is going to trickle down to consumers across the board, or whether the price will settle somewhere lower before the pressure of this price does have a global impact. I think the US economy is in the toilet already, thus will every other nation's economy be within the next two years.
"Oil has become a financial vehicle for pension funds to hedge against inflation, terrorist attacks and events in countries like Venezuela and Iran."
Why do you think this is, and why is it having such an effect on the price of oil? My take on this is that with Peak oil either having passed or being on the horizon, there's no slack in the system to absorb any sort of unknown, so now that is continuously being factored into the price of ALL commodities, not just oil, because extraction of all other commodities are collectively dependent on, you guessed it, oil. Without gobs and gobs of cheap oil to flood the system, the fundamental economics of everything are being forced to change. We're only seeing the beginning of this trend...