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Oil prices surged to a six-month high above $66 a barrel last week, despite protests from most observers that fundamentals of supply and demand did not support such a move. A combination of factors was behind the sudden rise. Most important was the fall of the US dollar to a recent low of $1.41 against the Euro, sending traders into commodities for protection. An unexpectedly large drop in the US crude inventory of 5.4 million barrels and statements by the Saudi Oil minister that demand for oil from Asia was picking up contributed to the increase.
Other drivers behind the move were an increase in consumer confidence in the US; a 5.8 percent growth in India’s GDP in the first quarter; a 5.2 percent increase in Japan’s industrial production; and a statement from OPEC’s Secretary General that oil prices may reach $70 to $75 by the end of the year.
The recent fall of the dollar is tied to concerns about the extremely large offerings of US Treasury securities that have been coming on the market to finance the various bailouts, deficits, and stimulus packages. Last week there was a sudden surge in interest rates suggesting that the world’s financial institutions are becoming concerned about the size of US deficit spending.
Oil prices have now doubled from the January 20th low of $32.70 a barrel, raising concerns that sharply higher energy prices are damaging the prospects for an economic recovery. While Saudi Oil Minister al Naimi said the strengthening global economy can handle prices in the area of $75-$80 a barrel in coming months, others are worried. The $34 a barrel price jump and the increased burden on consumers since the Obama inaugural goes a long way towards offsetting this year’s benefits from the $800 billion stimulus package.
Despite the market’s optimism, the evidence for a near-term economic recovery remains thin. Higher interest rates are bound to trouble the US housing market. The consequences of the likely GM bankruptcy this week are unknown but are unlikely to be good in the near term. There is still no significant let-up in the pace of US job losses. OECD oil stocks, now at 62 days of consumption, are at their highest level in 16 years.