Oil Over $90

Barry Ritholtz has a great post looking at the rise in crude. He identifies five crucial factors:

1. Increasing Global Demand: Booming growth in China and along the Pacific rim is only the beginning of the global story. India, Korea, Russia, Brazil, and Australia are expanding. Even “old Europe” has experienced a spurt in growth. This may be an old story, but it has yet to fully run its course.
2. Falling U.S. Dollar: The dollar is at 15 year lows versus a basket of currencies. Blame the Federal Reserve for failing to protect the currency, and forcing capital to go where its treated better.
Fun thought of the day: Imagine if every time Treasury Secretary Hank Paulson said “We have a strong dollar policy” — and the dollar dropped yet further, his nose grew another inch, Pinocchio-style. I originally was going to suggest a college drinking game where you do a shot each time, but I wouldn’t want all those alcohol-related deaths on my conscience.
3. Wars in Iraq, Afghanistan: Its why I flipped bullish on Crude way back in 2002. The two hot wars in the Middle East have increased tensions, reduced Iraq’s oil output, and generally led to higher terror premiums for Crude Oil. Future administrations should take note of this simple formula: Mid-East War = Higher Crude Prices.
4. Supply constraints: US crude oil stocks unexpectedly fell by 5.3 million barrels last week, and we have a variety of infra-structure issues contributing to this factor. Globally, there is a tight supply of ships, refineries, pipelines, and storage facilities. This contributes to a minimum amount of reserve — no buffer — which means Crude Oil Futures fluctuate even more than they might otherwise.
5. Saber-rattling against Iran: The increased jaw-boning against Tehran in general and the Revolutionary Guard in particular. A variety of analysts have noted that threats of US sanctions against Iran and tension on the Iraqi border had also helped fuel the oil rally.

Barry has been rightly critical of the government’s inflation data for a long time. But what’s interesting is the prices at the pump haven’t risen nearly as much as crude prices.

Posted by Eddy Elfenbein on October 26th, 2007 at 3:30 pm

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