Oil prices surging on increased demand, weak dollar

Light sweet crude oil for December delivery once hit a record high of $98.62 a barrel in electronic trading on the New York Mercantile Exchange on Wednesday. The prices have surged about 40% since August, and some analysts said the prices could climb above $100 a barrel in the near future. Robust global demand boosted by the overall upward trend in the world economy has been the decisive factor for record-breaking surges in oil prices, said analysts.

According to an October report issued by the Paris-headquartered International Energy Agency, daily demand for crude oil is expected to reach 88 million barrels next year, a 2.4% rise over this year’s figure. According to the agency’s latest forecasts, global daily demand is likely to grow steadily in the longer-run and is expected to hit 98 million barrels in 2015. However, the combination of robust demand and limited excess production capacity is the main cause behind the unsteady supply-demand balance, which means some factors could cause wild price fluctuations, although other factors like market speculation may boost the prices.

The weak dollar, as a result of the two consecutive cuts in interest rates by the US Federal Reserve, dropped to a new low against the euro on Wednesday, making oil prices relatively “cheaper” for euro or other currencies’ holders. Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling. Besides, the crisis in the US subprime mortgage loan market which erupted this summer has shaken the world’s major financial markets, and consequently, there has been more inflows of speculative capital in the oil futures market, with speculators trying to avoid risks brought about by turbulence in stock markets.

The crisis has also kept alive the prospects of another interest cut by the US Federal Reserve. The geopolitical factor has also fueled the worries about the oil futures’ price hike. The lingering dispute over Iran’s nuclear issue, Turkey’s possible cross-border attack against Kurdish Workers’ Party rebel bases in northern Iraq and news of an attack Monday on an oil pipeline in Yemen have all led to worries over oil supplies. As Iran and Iraq are both members of the OPEC while Yemen is an important oil-producer, political instability in these countries would have a considerable impact on crude supplies in the international market.

Moreover, the recent drop in US crude stockpiles, bad weather which could affect production in the US and Mexico, and imminent high demand for heating fuel in the Northern Hemisphere have all contributed to the surges in oil prices. Analysts said that if traders sell futures contracts for profit-taking in face of the unprecedented high prices, the prices, as what happened in the second half of last year, will witness a drop after a huge surge. If they anticipate more price hikes and buy in more futures contracts, the oil prices are likely to continue to hit new highs. (people.com)