Crude oil futures surged above $108 a barrel Monday on weak dollar and expectation that Federal Reverse would cut interest rates again. Light, sweet crude for April delivery rose $2.70 to $107.85 on the New York Mercantile Exchange after earlier setting a new trading record of $108.17. In London, Brent crude futures rose $1.79 to $104.17 a barrel on the ICE Futures exchange.
If the dollar keeps falling — a scenario likely to happen if the Federal Reserve cuts interest rates further, and if funds keeps building up in commodities market — the prices of oil and other dollar-bases commodities such as gold could break new records in the short term, analysts said. “Unless the dollar can stage a major recovery,” or the oil market sees waning interest from funds, fewer geopolitical risks or threats from an economic slowdown rise, “the market’s trend will likely remain up,” said John Kilduff, an analyst at futures brokerage MF Global, in a recent report. “An eventual move to the $110 to $115 price range can’t be ruled out,” he said. “The dollar is likely to fall as the Fed is seen to cut interest rates further, and this could push up oil prices even higher,” said Darin Newsom, senior analyst at DTN, a commodities information provider in Omaha. “I am seeing oil rise to the range of $109 to $115” a barrel, he said.
Some analysts are making even bolder calls. In a recent report, Goldman Sachs says $200 a barrel could be a reality in the near future if an unexpected factor emerges, such as a major supply disruption. “A future rebound in US GDP growth or a major oil supply disruption could lead to $150-$200 a barrel oil prices,” Goldman said in a report released on Friday.
INCREASED SPECULATION
The oil market has seen unusual run-up recently. Last Wednesday, oil rallied $5 a barrel, the biggest daily gain in value since crude futures started trading on the Nymex in 1983. Crude has risen nearly $20 in just one month. Gold prices, at the same time, are approaching the $1,000 mark. Oil and gold are up nearly 10% and 20% this year respectively. Similar scenarios have played out in other commodities, from wheat to coal.
A weaker dollar increases the purchasing power of buyers holding other currencies, giving them the means to bid up commodities like oil. It forces investors to look for other assets, such as gold or grains, to protect against falling real values in stocks or real estate. The weaker greenback also eats into dollar revenues of oil producers and could prompt them to curtail production, thus adding more upward pressures on oil.
“In the short run, the dollar’s devaluation increases speculation,” said A.F. Alhajji, a professor, who specializes in energy at Ohio Northern University. “In the long run, a weak dollar increases demand and decreases supply.” The circle of the weak dollar and rising oil prices could even reinforce itself. When oil prices increase, oil producing countries accumulate large financial surpluses. Part of these surpluses, are recycled into the world financial markets, with some ending up in oil futures. “In other words, some of the oil revenues are being used to buy oil futures and bid oil prices up,” Alhajji said. (full article) (people.com.cn, Marketwatch)
