Saturday, 19 July 2008

Where are we on the oil price ?

First, apologies for the lack of articles in the past week. The PC failed spectacularly on Monday evening and I only got it back this morning. One of the problems of running Windows 2000 is that most current software no longer works with that OS so I suppose I'll have to upgrade to Vista...

As predicted, it's been a volatile week on the stock markets with the FTSE100 testing some seriously low numbers on Wednesday (down to not much over 5000) before rallying spectacularly in line with a near 3% rise in the Dow Jones. The US market rallied on good figures from Wells Fargo and a fall in the oil price (perhaps the week's most significant development) to near $130 a barrel.

Indeed, on Thursday evening in the London Evening Standard, Anthony Hilton wrote an interesting Comment piece suggesting the oil price could be back to as low as $110 a barrel by September. This article came not long after the IMF revised its estimations for world growth significantly upwards which was also received positively by the nervous markets.

Now, the thrust of Hilton's argument is that as worldwide economic activity declines (signs of that not only in the US and Europe but even in China and India) the demand for oil will fall leading to a fall in price. If that's right, that doesn't sit well with the IMF projections since economic growth will continue to keep demand for oil high. In any case, it's summer in the northern hemisphere and demand is at its weakest anyway.

I don't share Hilton's optimism on the oil price though I think we will see a short-term continued fall. As we move into the autumn and winter, it seems inevitable that rising demand will put pressure on the price once again as will the ongoing tension with Iran (today's meeting in Geneva seems to have achieved nothing) and uncertainty over the US election. In addition, IF the IMF is right about economic growth, we will see continued strong demand from the developing world in spite of a slowdown in Europe and the US.

Motorists may enjoy some relief as pump prices ease in the next few weeks but the era of cheap oil has gone and we may yet see further pressure in the months ahead.

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