Oil Better Bid on Stimulus Bets

Oil prices are racing higher as investors bet that central bank cash will soon boost a market afraid of Middle East war and worried about North Sea supplies, but the rally looks increasingly inflated by speculative guesswork.

Oil is up almost a third in six weeks at a time when the world economy, and hence fuel demand, are extremely weak.

Today’s oil price assumes the U.S. Federal Reserve will soon launch a new round of quantitative easing to stimulate the economy, or that bellicose rhetoric between Israel and Iran will lead to conflict, or that North Sea production problems will be long-lasting.

But none of these factors is a safe bet and if they were removed, the price of oil could fall quite sharply.

“The market is decoupling from fundamentals,” said Carsten Fritsch, an analyst at Germany’s Commerzbank in Frankfurt. “Much of the strength is based on factors – such as more U.S. economic stimulus – that are far from guaranteed.”

Brent crude oil hit $115 per barrel on Monday, its highest for three months and up 30 percent since the end of June. Oil hit an all-time high of $147 in mid-2008 just before the onset of the credit crisis, which sent prices down to $36 just six month later.

Oil prices are now well above the $50-$80 per barrel cost of production from most of the world’s newest oilfields, a level believed to be a natural floor for oil prices.

One spur for prices has been concern over a fall in North Sea output due to planned maintenance, which will help cut production in September by 17 percent from a dozen British and Norwegian crude oil streams.

For a short period, the North Sea oil spot market could be squeezed if demand for some grades outstrips supply, traders say, but maintenance work is likely to be completed fairly quickly and supplies will then resume.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell