| Oil will power to $100 a barrel |
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| Written by Gary Howes |
| Monday, 22 June 2009 09:50 |
The price of oil after all is often referred to as a barometer of global economic health ... With the release of better than expected economic data, the recent surge in the price of crude oil should come as no surprise. The price of oil after all is often referred to as a barometer of global economic health. Many OPEC members seem quite content with the current price but Greg Smith Managing Director of Independent Advisors Fat Prophets believes that it is only a matter of time before oil breaches the US $100 mark, giving the cartel more to chew on. The prediction comes on a day when oil companies Shell (LON:RDSA) and BP (LON:BP) are both suffering on the FTSE in response to weaker oil price data on Friday. A long buy of shares in the companies could be a wise investment considering the pace of economic improvement in the global economy as the year progresses. With Shell and BP down by a percent this morning this could prove a good time to buy. Currency weakness will underpin oilGrowing economic sentiment is just one push factor on the oil price - expect the value of the US dollar to also chip in says Smith: “It is staggering how the price of oil has doubled since February in the absence of any positive economic data. In fact the International Energy Agency forecast sets the estimated contraction in demand at 2.47 million barrels of oil per day. The market is clearly recognising the inflationary potential of the quantitative easing programme underway in the West as well as how structurally impaired the US dollar is right now. There are many examples throughout history of nations’ currencies losing value through continuous overspending, over borrowing, and overprinting. In the last two thousand years we have witnessed the demise of the Roman denari, the French livre (under the influence of John Law) in the 1720s, the German mark in the 1920s and the British pound lost its role as the world’s reserve currency to the US dollar. It is only a matter of time before the US dollar’s role as the world’s reserve currency comes into question. “This currency weakness will underpin oil but as and when demand actually begins to tick up we are likely to see a dramatic upward re-rating. It is also worth noting that the supply side story is dominated by maturing oilfields and the fact that the world’s easy oil is no more. And although production is becoming more expensive, renewable sources remain highly inefficient in comparison and in the main are not commercially viable. In addition, the high level of compliance from OPEC’s Members in respect of previous production cuts is acting as a tailwind. Self regulating mechanismHowever with the health of the global economy still very much in the balance a spike in oil price could derail the recovery and it will not be long before the cartel will face considerable pressure to turn on the taps. The pace with which the situation has been turned on its head is startling. 
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