While oil prices could continue trading between $70 to $80 a barrel for the remainder of 2010, Goldman Sachs (NYSE:GS) sees oil prices rising to the $100 a barrel range by the end of 2011.
Reasons cited were the weakening U.S. dollar and stronger oil demand that originally believed.
One thing that could hinder that assertion would be the recession continuing on into 2011, which could decrease demand levels, along with oil prices.
An analyst at Goldman believes the $100 a barrel mark could be reached sooner rather than later.
If the economy actually begins to improve, existing constraints could be removed and oil prices begin to surge.
Showing posts with label Global Economy. Show all posts
Showing posts with label Global Economy. Show all posts
Wednesday, October 20, 2010
Tuesday, September 30, 2008
Third Quarter Oil Price Drop Largest in 17 Years
Oil experienced one of its largest price swings in history during the third quarter as prices fluctuated within a range of $56 a barrel. From its record high of $147.27 a barrel on July 11, it went a low as $90.51 a barrel on September 16.
Overall in the quarter oil futures fell by 28 percent, the largest fall since 1991.
Along with the obvious economic factors which have slowed down oil demand, there is also the strengthening of the U.S. dollar during that period as well.
November delivery for crude oil fell to close to $40 during the quarter to settle at $100.64 at about 3:00 p.m on the NYMEX. That's the first time it has fallen in seven quarters. It went up by $4.27 in today's trading.
When you take into account OPEC announcing they're cutting production, and the two hurricanes recently hitting the south and disrupting oil flow, it's really an amazing event that the black liguid has stayed this low. Add the ongoing Nigerian attacks on their pipelines and rigs, along with the conflict between Russia and Georgia and it's even more astounding.
It seems like oil futures are completely driven by demand at this time, as according to Deutsche Bank the price of Oil for 2009 New York will probably drop by 23 percent to around $92.50 a barrel. At this time U.S. demand for petroleum has dropped about 4 percent from the same period last year.
Although gas prices increased by almost 9 cents today, overall its followed the decline in oil for the quarter, dropping by 11 percent to end at a nationwide average of $3.633 a gallon, according to AAA.
Overall in the quarter oil futures fell by 28 percent, the largest fall since 1991.
Along with the obvious economic factors which have slowed down oil demand, there is also the strengthening of the U.S. dollar during that period as well.
November delivery for crude oil fell to close to $40 during the quarter to settle at $100.64 at about 3:00 p.m on the NYMEX. That's the first time it has fallen in seven quarters. It went up by $4.27 in today's trading.
When you take into account OPEC announcing they're cutting production, and the two hurricanes recently hitting the south and disrupting oil flow, it's really an amazing event that the black liguid has stayed this low. Add the ongoing Nigerian attacks on their pipelines and rigs, along with the conflict between Russia and Georgia and it's even more astounding.
It seems like oil futures are completely driven by demand at this time, as according to Deutsche Bank the price of Oil for 2009 New York will probably drop by 23 percent to around $92.50 a barrel. At this time U.S. demand for petroleum has dropped about 4 percent from the same period last year.
Although gas prices increased by almost 9 cents today, overall its followed the decline in oil for the quarter, dropping by 11 percent to end at a nationwide average of $3.633 a gallon, according to AAA.
Saturday, August 2, 2008
The US dollar and Oil
Prior to the oil price going through the roof last Friday, something unusual occurred - the US dollar rallied. The stronger greenback impacted the commodity markets, with oil, base metals and the Dow Jones Industrials for that matter all falling sharply.
The source of the beleaguered US dollar's rally was hawkish inflation comments from Fed Chairman Ben Bernanke, in a speech at the International Monetary Conference in sunny Barcelona, Spain. The foreign exchange market's ears pricked up with the following words:
"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
It's extraordinary that after years of US dollar weakness, the Fed decides that now is the time to act concerned. We believe there are a few reasons for this change of tact, mainly political. But there are many more reasons why the Fed's words are unlikely to be backed up with actions, and for this reason, we expect continued US dollar weakness and rising inflation in the years ahead.
Let's put Bernanke's dollar comments into context.
Since September last year the Fed has slashed interest rates from 4.75% to 2%, a massive reduction in nominal terms. But in an inflationary environment, the reduction in real interest rates has been even greater. With inflation running around 4% (officially...) real rates are negative.
While the Fed's intent was to prop up careless Wall Street investment banks, negative real rates have caused frenzied speculation in the commodity markets, most notably oil. Following the recent round of interest rate cuts, the oil price rallied to more than US$130 a barrel, a level that is clearly destabilising for the global economy.
Markets were not helped either by Israel's threats to attack Iran should the Iranians continue to develop a nuclear capability. How this development will play out is anyone's guess but with Iranian President Mahmoud Ahmadinejad threatening to destroy Israel a few years ago, it is unlikely that the Israeli's are bluffing. There is also a precedent in 1980 when Israeli jets bombed a nuclear reactor that was being built in Iraq,
US Treasury Secretary Henry Paulson has had his hands full in the Middle East, where he had face to face talks with one of the US Treasury's biggest group of lenders, OPEC. Oil producing nations have for decades recycled billions of US petro dollars back into US treasury bonds and securities, thus providing financial support for the dollar. But there are signs this relationship may be coming to an end.
Inflation, which has lain dormant for many decades, is now making a come back that Elvis would be proud of. The once harmonious relationship that existed between the US and OPEC is no longer comfortable.
Most of the Mid East oil producers have their currencies pegged to the dollar, which means they cannot conduct monetary policy independently. So when US rates fall, their official interest rates also decline.
As a result, inflation is running at double-digit rates in most of these countries, which is in turn leading to questions over whether the currency pegs should be maintained (and indeed China is asking itself the same question). With a chronically weak US dollar, these countries are massively disadvantaged. As well as importing inflation, a socially destabilising effect, they are selling a finite asset (crude oil) for depreciating dollars.
So Henry Paulson's recent trip to the Mid-East would have made for particularly interesting conversation. OPEC's support for the US dollar is crucial. Because oil is priced in dollars, all oil production is 'monetised' in US dollars and provides a huge source of demand for the Greenback. We believe that without OPEC being onside, the US dollar is completely exposed.
Imagine if oil were all of a sudden traded in euro's? The US, with its huge oil bill, would no longer be able to print dollars (issue treasury bonds to OPEC and China) to pay the bills. Instead, it would be required to borrow euro's to buy the required amount of oil. Nearly every other country around the world would also be in the position of no longer having to buy dollars to pay for oil.
While a switch to the euro (or a basket of currencies) is not about to happen any time soon, this explanation provides some idea of how interlinked the US dollar and oil are, and inevitably, the price of gold. Behind closed doors Henry Paulson was undoubtedly given some stern words over the strength of the US dollar, or lack thereof. "If you want us to maintain our currency pegs, stop devaluing your currency." Or words to that effect.
And as Bernanke noted in his speech in Barcelona, "in collaboration with our colleagues at the Treasury...we are attentive to the implications of changes in the value of the dollar for inflation..."
Given Paulson has zero credibility in talking up the dollar (he of the strong dollar mantra) he has obviously 'collaborated' with the Federal Reserve and enlisted the credible Bernanke to try and win the FX market over. And they listened, for a few days at least. We suspect that the very short term speculators were spooked out of their positions, and the dollar benefitted from short covering. On the flip side, commodities and commodity related stocks sold off sharply.
But the reality is that Bernanke will have to do more than just 'talk the dollar up'. Soon after Bernanke's comments last Tuesday, the European Central Bank was again talking tough on inflation (they have better form in managing inflation expectations) and the dollar promptly sold off against its main rival, the euro.
Then, in US trade on Friday, firm evidence arrived that the US economy is indeed slowing down, with the unemployment rate soaring from 5% to 5.50% following the release of May's payroll statistics.
These numbers confirmed to us that if the US economy is to avoid a deep recession, interest rates will remain low, and by implication, real interest rates will remain negative.
The geopolitics now being played out in the Middle East add another layer of complexity to the oil market. And with Barrack Obama being the clear favourite for the Whitehouse at the end of the year, the risk of an Israel/Iran conflict is now rapidly escalating. We thought oil was due for a correction last week, but the threat of Israeli action could drive oil even higher, and this is now being reflected with a risk premium being priced into the market
This creates more headaches for the US in their attempts to control inflation.
Inevitably, no matter how much Bernanke tries to anchor 'inflationary expectations', the reality of negative real interest rates will ensure inflation in the US (and globally for that matter) continues to gather momentum.
The attached chart shows the recent performance of long term US Government bond yields. If inflationary pressures continue to build, and we suspect they will, bond yields will slowly rise and bond prices will slowly fall.
The reality is that if the US wants to fight inflation, it must raise rates. As we have repeatedly stated, we do not see that as a realistic policy option for the US and we believe the authorities will continue to 'manage' the US dollar lower. The extraordinary volatility we are witnessing in the markets on an almost daily basis is the result of these huge imbalances that have become embedded in the global economy. The market is now attempting to right these imbalances through a serious bout of global US dollar inflation, which is being passed on to every other nation in the world.
About the Author
Fat Prophets are leading global independent stock market advisors with a comprehensive product range of research reports for all investors. Visit the Fat Prophets website to learn more and get expert advice on investing in shares and managed funds.
The source of the beleaguered US dollar's rally was hawkish inflation comments from Fed Chairman Ben Bernanke, in a speech at the International Monetary Conference in sunny Barcelona, Spain. The foreign exchange market's ears pricked up with the following words:
"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
It's extraordinary that after years of US dollar weakness, the Fed decides that now is the time to act concerned. We believe there are a few reasons for this change of tact, mainly political. But there are many more reasons why the Fed's words are unlikely to be backed up with actions, and for this reason, we expect continued US dollar weakness and rising inflation in the years ahead.
Let's put Bernanke's dollar comments into context.
Since September last year the Fed has slashed interest rates from 4.75% to 2%, a massive reduction in nominal terms. But in an inflationary environment, the reduction in real interest rates has been even greater. With inflation running around 4% (officially...) real rates are negative.
While the Fed's intent was to prop up careless Wall Street investment banks, negative real rates have caused frenzied speculation in the commodity markets, most notably oil. Following the recent round of interest rate cuts, the oil price rallied to more than US$130 a barrel, a level that is clearly destabilising for the global economy.
Markets were not helped either by Israel's threats to attack Iran should the Iranians continue to develop a nuclear capability. How this development will play out is anyone's guess but with Iranian President Mahmoud Ahmadinejad threatening to destroy Israel a few years ago, it is unlikely that the Israeli's are bluffing. There is also a precedent in 1980 when Israeli jets bombed a nuclear reactor that was being built in Iraq,
US Treasury Secretary Henry Paulson has had his hands full in the Middle East, where he had face to face talks with one of the US Treasury's biggest group of lenders, OPEC. Oil producing nations have for decades recycled billions of US petro dollars back into US treasury bonds and securities, thus providing financial support for the dollar. But there are signs this relationship may be coming to an end.
Inflation, which has lain dormant for many decades, is now making a come back that Elvis would be proud of. The once harmonious relationship that existed between the US and OPEC is no longer comfortable.
Most of the Mid East oil producers have their currencies pegged to the dollar, which means they cannot conduct monetary policy independently. So when US rates fall, their official interest rates also decline.
As a result, inflation is running at double-digit rates in most of these countries, which is in turn leading to questions over whether the currency pegs should be maintained (and indeed China is asking itself the same question). With a chronically weak US dollar, these countries are massively disadvantaged. As well as importing inflation, a socially destabilising effect, they are selling a finite asset (crude oil) for depreciating dollars.
So Henry Paulson's recent trip to the Mid-East would have made for particularly interesting conversation. OPEC's support for the US dollar is crucial. Because oil is priced in dollars, all oil production is 'monetised' in US dollars and provides a huge source of demand for the Greenback. We believe that without OPEC being onside, the US dollar is completely exposed.
Imagine if oil were all of a sudden traded in euro's? The US, with its huge oil bill, would no longer be able to print dollars (issue treasury bonds to OPEC and China) to pay the bills. Instead, it would be required to borrow euro's to buy the required amount of oil. Nearly every other country around the world would also be in the position of no longer having to buy dollars to pay for oil.
While a switch to the euro (or a basket of currencies) is not about to happen any time soon, this explanation provides some idea of how interlinked the US dollar and oil are, and inevitably, the price of gold. Behind closed doors Henry Paulson was undoubtedly given some stern words over the strength of the US dollar, or lack thereof. "If you want us to maintain our currency pegs, stop devaluing your currency." Or words to that effect.
And as Bernanke noted in his speech in Barcelona, "in collaboration with our colleagues at the Treasury...we are attentive to the implications of changes in the value of the dollar for inflation..."
Given Paulson has zero credibility in talking up the dollar (he of the strong dollar mantra) he has obviously 'collaborated' with the Federal Reserve and enlisted the credible Bernanke to try and win the FX market over. And they listened, for a few days at least. We suspect that the very short term speculators were spooked out of their positions, and the dollar benefitted from short covering. On the flip side, commodities and commodity related stocks sold off sharply.
But the reality is that Bernanke will have to do more than just 'talk the dollar up'. Soon after Bernanke's comments last Tuesday, the European Central Bank was again talking tough on inflation (they have better form in managing inflation expectations) and the dollar promptly sold off against its main rival, the euro.
Then, in US trade on Friday, firm evidence arrived that the US economy is indeed slowing down, with the unemployment rate soaring from 5% to 5.50% following the release of May's payroll statistics.
These numbers confirmed to us that if the US economy is to avoid a deep recession, interest rates will remain low, and by implication, real interest rates will remain negative.
The geopolitics now being played out in the Middle East add another layer of complexity to the oil market. And with Barrack Obama being the clear favourite for the Whitehouse at the end of the year, the risk of an Israel/Iran conflict is now rapidly escalating. We thought oil was due for a correction last week, but the threat of Israeli action could drive oil even higher, and this is now being reflected with a risk premium being priced into the market
This creates more headaches for the US in their attempts to control inflation.
Inevitably, no matter how much Bernanke tries to anchor 'inflationary expectations', the reality of negative real interest rates will ensure inflation in the US (and globally for that matter) continues to gather momentum.
The attached chart shows the recent performance of long term US Government bond yields. If inflationary pressures continue to build, and we suspect they will, bond yields will slowly rise and bond prices will slowly fall.
The reality is that if the US wants to fight inflation, it must raise rates. As we have repeatedly stated, we do not see that as a realistic policy option for the US and we believe the authorities will continue to 'manage' the US dollar lower. The extraordinary volatility we are witnessing in the markets on an almost daily basis is the result of these huge imbalances that have become embedded in the global economy. The market is now attempting to right these imbalances through a serious bout of global US dollar inflation, which is being passed on to every other nation in the world.
About the Author
Fat Prophets are leading global independent stock market advisors with a comprehensive product range of research reports for all investors. Visit the Fat Prophets website to learn more and get expert advice on investing in shares and managed funds.
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