High-flying barrels
Oil: Oil nudging $100 per barrel may be just the beginning. Demand, speculation, a softish dollar and high liquidity all favour a destabilising oil-price spike. Commodities generally look set to give central banks extreme difficulty, driving up inflation and making banks mull rate rises they would prefer to defer until recovery is entrenched. But orbital oil is not a dead cert. Renewed euro zone panics could provoke dollar spurts that would be quick to temper oil's heat.
One factor in oil’s rise is a global recovery that is stronger than widely predicted. OPEC says as much in its monthly report released on January 17. The cartel of leading oil producers has raised its previous estimate for global oil demand in 2010, and its demand forecast for 2011. But OPEC has also argued that the oil market is well supplied for now, and is blaming the current oil strength on “increasing commodity investment” — code for speculators.
OPEC’s assessment is self-serving yet may be mostly correct. There are many green lights now for oil and commodities. The world economy is certainly picking up. Inflation is now above central bank targets in both the euro zone and the UK but in neither case does a rate rise look imminent. The euro zone is still preoccupied with its periphery; the Bank of England about the impact of fiscal tightening.
Central banks must also weigh the negative impact of oil prices themselves on demand. The money that consumers pour into their fuel tanks can’t be spent on other goods and services. That presents policymakers with a dilemma: allow the oil price spike to run its course — as most, though not the European Central Bank, did in 2008 — or react to the inflation it causes.
But the fact is that inflation remains low in the United States. And the Federal Reserve’s $600 billion second round of quantitative easing continues to be unfurled. With US money still ultra loose, the dollar’s rally is tentative. That too favours commodity speculation. Euro panics could boost the dollar and hit oil and commodities in bouts of potentially fierce turbulence. But for now, demand, rates and liquidity favour oil and commodities’ ascent.