Oil has risen due to several factors. One, it has jumped with equity markets which have been on a tear lately, surging over 2.5% yesterday as some economic data – including manufacturing reports showing that China and India output has improved – hint that the worse of the economic crisis may be over. Traders believe that greater economic activity should raise demand for oil and therefore its price. Two, oil has also risen as the value of the US dollar continues to fall (As oil is denominated in dollars in the international market, this has kept the oil price constant with other currencies). Three, investors may also be plowing into commodities as they are concerned about potential inflation as governments spend more to stimulate the economy. (Commodities are often a place for refuge to protect against inflation.)
There are two likely short-come outcomes. One, oil continues to trade on expectations of economic growth and rises to reach $75-85 by year’s end and continue. Two, prices moderate (read: fall) in the near-term until the fundamentals of supply and demand fall in line with historic levels and begin drive up price levels. Unless fundamentals catch up with current market expectations prices have little support to be at near $70/bbl levels. (Note: Although this discussion has been about oil, the same could be said about natural gas. It has even larger supply issues that make holding the recent increase in price, which has risen with oil, more difficult.)
Tomorrow’s release of EIA numbers should give some greater insight into fundamentals. The consensus opinion according to Platts energy, a leading supplier of energy research, is that stocks should fall slightly due to the beginning of summer driving season. The market reaction to the release should begin to give an indication of oil’s path.
