Oil price will rise again

19 September 2008
With the US dollar gaining strength and Opec poised to cut production in the coming months, the oil price should regain some ground.

Unlike earlier in the year, oil has failed to escape the impact of the latest global financial downturn. As financial exchanges around the world continue to fall, the price of a barrel of West Texas Intermediate (WTI), the US benchmark crude, reached a low of $91.15 at market close on 16 September, 38 per cent down on the record of $147 reached in July.

Saudi Arabia and its fellow members of Opec, the international oil producers group, had argued that the summer oil price peak was not a true reflection of the fundamentals of supply and demand. Instead, Opec members claimed the price was artificially inflated by market traders investing in oil futures as an alternative to the weak dollar.

The dramatic decline in prices as these same traders have exited their positions suggests that Riyadh and its oil-producing peers may well have been right.

While the oil price bubble is not considered to have been as severe as that in US real estate, lessons have still been learned, and it is difficult to envisage that oil prices will again be so inflated by futures trading, at least in the foreseeable future.

US investment bank Goldman Sachs has lowered its three-month forecast for WTI to $115 a barrel from $149, and revised its 2009 price forecast to $123 a barrel from $148. It predictions are still among the more bullish in the marketplace.

Weakening demand in the developed world and falling demand growth in China has turned attention to the market’s downside risk. Goldman Sachs argues that if the current macroeconomic concerns develop into a full-blown recession, prices could dip as low as $75 a barrel.

But with the US dollar gaining strength and Opec poised to cut production in the coming months, there is likely to be enough oil price support for it to regain some ground.

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