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Crude Oil Tops $85; On Its Way to $100?


The price of crude oil has been rising steadily for the past two months on indications that the global economy is recovering. The price is now above $85/barrel on the NYMEX, a jump of about 25% just since February.

Today’s rise follows yesterday’s report from the US Energy Information Administration that US crude stocks had increased by 2.9 million barrels last week. Clearly fundamentals are not playing a major role in the rising price of crude.

Consulting firm Cameron Hanover attributes the rise to “good vibrations” from the global economy gaining speed, which should lead to an increase in demand for oil. Now that the $85/barrel level has been broken, the next stop is $90. Can $100/barrel crude be far behind?

That really depends on how much faith one is willing to put on the weak fundamentals of the crude market. Demand is down in the US, and it has been for more than two years. Globally, demand is also down, but by a smaller amount due mostly to increased demand from developing countries, particularly China. A weak dollar, the currency in which oil is traded, contributes to the price rise as traders seek to hedge dollars with oil.

A positive economic indicator rose earlier today as the European purchasing manager’s index rose from 54.2 in February to 56.6 in March. Germany led the charge with a PMI of 60.2, its highest level in nearly 10 years. France and Italy also posted gains in PMI. Greece’s PMI fell to an 11-month low of 42.9 as the Greek government continues trying to deal with the country’s expanding budget deficit.

China, too, saw a rise in its PMI, from 55.8 in February to 57 in March, the third highest monthly gain in six years. That figure is not altogether good news for China because the rise in manufacturing together with the rise in crude oil prices suggests that inflation could become a problem in China during the next few months.

China’s lending growth has slowed as a result of the government’s reserve requirement increase. The Chinese government has maintained low lending rates, and that policy is not expected to change much in the rest of this year. The government simply does not see nor expect inflation.

If US unemployment data is good tomorrow, expect crude oil prices to move up further on Monday (markets are closed on Friday). The move will once more be on “good vibrations”.

At some point, though, the price of crude will be decided by the fundamentals of supply and demand. When that happens, crude prices will come under pressure.

Oil producers are likely to add to that pressure. Producers, including OPEC, are more amenable to direct government action to keep crude prices at a level that provides a good profit, but that does not curtail demand. OPEC has said it is happy with a price of $70-$80/barrel, implying that $90/barrel does not make them happy.

If OPEC, actually Saudi Arabia, turns on the tap to its unused capacity, another 5 million barrels/day could hit the market. Economic growth or not, that amount of new oil would certainly hold prices down.

A crude price in triple digits does not look to be in the cards for the near term. Governments surely don’t want it, manufacturers don’t want it, and oil producers don’t want it.

Tell us what you think here.

Article printed from InvestorPlace Media,

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