Should Investors Bet on Oil?
For most of the year, oil prices have offered little excitement, hovering at about $78.00 per barrel. The primary reason for such a non-eventful performance was the global economic growth that just did not have enough momentum to push up the demand for oil. In addition, inventories have been aplenty and major oil producers have been pumping enough oil to meet whatever demand there was. But this boring status quo might be changing now, as world central banks are pumping cash into global financial systems in efforts to jump start economic growth.
The Federal Reserve has already flushed $600 billion to keep interest rates low to stimulate spending, as well as to weaken the dollar to stimulate exports. With boom times behind us, investments offering a semblance of returns have became sparse, which is why some analysts predict that oil will become attractive as a potential source of at least decent, if not spectacular, returns.
Now, $600 billion in newly printed money may or may not bring inflation. Some argue that it will not, and are already vindicating Ben Bernanke’s decision to start with the QE2. I would be careful jumping on the celebratory wagon, however, because, if the past few years have taught us something, it is that too much cheap money in the system usually goes into commodities and, more often than not, into energy. Signs that history might be repeating itself are already here. Since early September, oil has gained about 17%, recently trading around $87.00 per barrel. However, if the price of oil goes up, it will not be due to inflationary pressures, but rather due to the weak U.S. dollar.
Perhaps it would be better to watch what OPEC is going to do next. As the greenback depreciates, cartel members may be in the mood to push for a higher price of oil, which is denominated in the U.S. dollar. In fact, they may have already started. Recently, Saudi Arabia’s Oil Minister, Ali Al-Naimi, said that an appropriate price range for oil should be between $70.00 and $90.00 per barrel, which is in contrast to the previous statement on how Saudis would be satisfied with the price of $75.00 per barrel.
This is the first time such a price range has been mentioned by an OPEC member and it may become modus operandi for other members, too. Namely, Al-Naimi also said that, until oil hits $90.00 per barrel, Saudi Arabia is not likely to pump more oil into the market. Mind you, the rest of OPEC is not thinking out loud yet, which could mean that members are simply waiting for the oil price run-up to materialize before nailing down the acceptable price range.
One more factor plays favorably for higher oil prices: rapidly growing emerging markets that are expected to reduce stockpiles significantly next year. Analysts estimate that the global oil demand could rise next year from 86.9 million barrels a day to 88.2 million barrels a day. Not surprisingly, speculators are already getting into the game and placing bets on rising oil prices.
Honestly, I don’t know what to think about oil. For years, we have been conditioned to think that the world is running out of oil and that the shortages would launch prices into space. Now it turns out that there is plenty of oil to have the world running in a moderate price environment. Sure, a deteriorating greenback is likely to put some pressure on OPEC to seek higher prices, but I don’t think that is a sufficient driver to push oil prices over the $100.00-per-barrel mark. In the end, the only fundamentals that matter are supply and demand. And, on that front, I don’t foresee any material changes in the near future.