Oil has, so far, traded higher primarily because of weakness in the dollar and the perception that demand will rise as the global economy recovers. It is likely that signs of the recovery will increase, at least temporarily.
China has shown that its expectations for its own crude demand are rising and that it needs to lock up supplies of oil to satisfy that growing need. It has recently invested in exploration and recovery of crude in Brazil, Venezuela, Iran, and even fields which sit off the US coast in the Gulf of Mexico. China’s GDP is expected to rise by over 8% in the current quarter and the country’s huge stimulus package and improving exports will only increase it need for new crude reserves.
If the Fed and other central banks in developed nations are correct, the Western economy emerged from a historically deep recession in the third quarter and will make very modest gains into 2010. That almost certainly means a renewed demand for crude. Any improvement in holiday retail sales means higher gasoline use and a cold winter in the Northern Hemisphere could increase the immediate need for oil even more.
The other important factor in crude prices is the potential of sudden and significant disruption in supply. In Nigeria, rebels have promised renewed attacks on production facilities. Iran’s ethnic and religious violence are likely to challenge the security of the central government in that nation.
The problem with oil prices is that there are a number of reasons for them to rise and very few reasons that they will fall.
Douglas A. McIntyre Follow 24/7 Wall St.’s coverage of major Wall St. rumors updated throughout the day.
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