Concerns over the rising price of oil are unjustified

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8 November 2010, Oil

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Crude oil prices have risen by about $10/bbl over October 2010, and are now threatening to reach $90/bbl. Influential though Saudi Arabia's oil minister is, something else is clearly going on. However, whatever it is, it has very little to do with the underlying oil market fundamentals which, if anything, are neutral to bearish. Oil supply is surging ahead, buoyed by the return of fields that were closed down for summer maintenance and the start up of new supplies.

OPEC's own members have once again seen supply creep upwards. Global oil supply is expected to rise by around 1.7-1.9 million barrels per day this year. On the demand side, the global picture looks relatively healthy, with 2010 demand likely to increase by around 1.6-1.9 million barrels per day versus the depressed 2009 level. Furthermore, stocks of crude oil and products remain close to historically high levels. In other words, supply and demand in 2010 are fairly balanced, with the likelihood that when the final numbers are in, supply will have exceeded demand, albeit by only a small amount.

In a normal world, this should make it hard for prices to move up much; indeed, the greater likelihood is that prices could fall. However, we are not in a normal world. It seems as though we are back in the world of oil as an asset class, with wider confidence in the future demand for all commodities (and thus higher prices) working alongside a lack of confidence in the short-term outlook of Western economies, which is manifesting itself in a weak dollar, the currency in which oil is traded. In other words, we have tomorrow's oil prices today.

Datamonitor does not believe that current market fundamentals justify oil prices rising much above current levels. Indeed, were prices to rise toward the $100/bbl level suggested by some, there is the possibility of the economic recovery being hampered even more than it is already.

Source: Datamonitor

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