High oil price is unlikely to last

Sep 20, 2012

Share with
friends:

Comments (0) Print this article

Crude oil prices have hit a four-month high of $117 a barrel. Investors have been anticipating more money printing, while mounting fears of an Israeli attack on Iran’s nuclear facilities in the next few weeks have fuelled worries over supply shortages. Military action could close the Strait of Hormuz, through which a fifth of global oil supplies pass every day. Riots elsewhere in the Middle East have also caused supply jitters.

Early this week prices eased amid speculation that the US would release some oil from its Strategic Petroleum Reserve (SPR). An SPR release would counteract any shortfalls in global supply and temper the rise in petrol prices, which is squeezing consumers.

What the commentators said

Oil’s demand and supply fundamentals look bearish. The shortfall caused by sanctions on Iran has been made up by higher production elsewhere, said Capital Economics. And with growth unlikely to revive, the markets’ focus will return to “the deterioration in economic conditions” that made “additional stimulus necessary in the first place”. Demand continues to fade.

So the latest price surge is due largely to concern over Iran and the “extraordinary” price spike everyone assumes would happen if armed conflict erupts, said Javier Blas in the FT. But the consensus, as so often, could well be wrong. Following an attack, “we wouldn’t be surprised if the initial impulse were a smaller-than-expected and briefer-than-expected oil price spike, followed by a stronger-than-expected oil price decline”, said Colin Fenton of JPMorgan.

Why? Because Western states could order a massive release of strategic reserves, while an attack would damage global confidence, weakening demand, and hence prices. Note that in 1991 oil slumped by $11 in a day – just after the first Gulf War began – as reserves were released.

And while oil prices jumped by 5% shortly after September 11th, three months later they were 25% lower as the wider economic impact of the attacks became obvious. The history of the Middle East and oil prices, said Blas, “should serve as caution against jumping on the bulls’ bandwagon”.

Comments (0)

Share with
friends:

Related articles

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>