Another week, another record. Oil has exceeded $120 a barrel due to violence in Nigeria disrupting supplies and optimism that America may escape a nasty recession, implying stronger future demand.
With spare capacity constrained, the market has “very little margin for error”, says Hussein Allidina of Morgan Stanley. So any supply-side disruptions will boost prices. Moreover, non-Opec demand has proved chronically weak, while there are doubts about Opec’s true reserves, as David Strahan notes on Telegraph.co.uk. Since 2005, global oil production has remained “essentially flat”.
Non-OECD demand has so far been robust, with China’s oil requirements expanding by 8% in March, while the ailing dollar, which bolsters greenback-denominated raw materials’ appeal, has offset the weaker American demand outlook, says Capital Economics.
Still, while worries over global production and emerging market industrialisation mean expensive oil is here to stay, the latest run-up looks overdone. Shell boss Jeroen van der Veer noted last month that investment monies into oil had soared to $3.4bn a week by mid-March, and Lehman Brothers says $40bn has flowed into commodity funds this year.
So it seems financial demand from investors seeking a hedge against inflation and a weak dollar, rather than fundamentals, explains much of the latest spike. Lehman also says inventories have been building since the beginning of the year and has cut its global oil demand forecast.
Oil prices are ignoring a “clear moderation” in growth in the State, still the world’s biggest oil consumer, and signs that American weakness is going global, says Christopher Wood of CLSA. The current surge in prices looks like a “parabolic move” before “the final unwind”.