The latest rise in oil prices is supposed to be based on two things. The first is a weakening dollar, which could be an issue for several months, depending on how hard the Fed will fight to combat the US liquidity and credit crisis.
The other factor is harder to gauge, which makes it more frightening. Over the last few weeks the perception has begun to emerge that the recession may be bottoming and that the global economy could pick up toward the end of the year, driving more crude consumption especially in the largest nations–the US and China. Recent data on manufacturing output would make the notion that the recession is blowing itself out unlikely. But, if consumer sentiment and business capex do not drop sharply, there will be enough anecdotal information to encourage some traders to bid oil up.
The trouble with the cycle of modestly good news leading to higher oil prices is that they could undercut any economic recovery. The low price of gas and petrochemicals has been one of the few bright spots that have benefited consumer living costs and helped manufacturing company margins. Those benefits may be coming to an end.
Douglas A. McIntrye
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