Oil
Oil prices made their biggest-ever jump yesterday after a senior Israeli politician raised the spectre of an attack on Iran and the American dollar fell against the euro.
The fire fuelling oil yesterday produced a second straight day of strong gains on energy markets, adding to suspicions that commodities might be caught in a speculative bubble.
The cost of light, sweet crude for July delivery soared $10.75 (U.S.) a barrel, or almost 8.4 per cent, to $138.54 after earlier hitting $139.12 on the New York Mercantile Exchange. The futures contract had already jumped 5.5 per cent on Thursday, guaranteeing more long faces on drivers at the gas pump.
Even as uncertainties abound about the fundamentals of the oil market, geopolitical tensions in the Middle East regained centre stage yesterday.
Israel’s transportation minister, Shaul Mofaz, said an attack on Iran’s nuclear sites looked "unavoidable."
Iran is the second-largest oil producer within the Organization of Petroleum Exporting Countries, and any interruptions in the country’s exports could well push prices higher levels.
"The return of the Iranian risk premium calls for a careful assessment of the potential oil-supply impact of military strikes on Iran," said Antoine Halff, an analyst at the Newedge energy brokerage.
The strong gains in energy markets in recent weeks have continued to puzzle investors and traders. Prices keep rising even thought the market is showing no sign of shortages, and, in fact, strong evidence suggests lower consumption in industrialized countries. But investors seem to be caught in a bullish mood, focusing instead on perceived risks to future oil supplies and continued growth in oil demand from emerging economies.
The weak United States dollar has also helped oil prices take their latest jump. The U.S. currency fell 1.4 per cent against the euro this week and 0.5 per cent versus the yen, Bloomberg News reported. When the greenback is worth less, traders in other countries and currencies can buy more oil for the money, adding to demand.
Investors also reacted yesterday to a large Wall Street bank predicting oil prices will spike to $150 a barrel in the next month because of strong demand from Asia.
Morgan Stanley said "an unprecedented share" of Middle East oil exports are headed to Asia.
Some analysts also said that the threat of a strike by Chevron’s workers in Nigeria could lead to "considerable" shutdowns of production there. A similar, week-long strike by Exxon Mobil workers last April reduced Nigerian output by 800,000 barrels a day, or nearly a third of the country’s exports.
A strike could also delay the start of Chevron’s Agbami project, the country’s largest offshore venture fast cash advance. Beginning June 15, the project is scheduled to produce 250,000 barrels a day that may be at risk.
One view gaining ground in recent months is that the commodity market is caught in a speculative bubble akin to the housing or technology bubble of the late 1990s. The notion is bolstered by the fact that oil prices have doubled in 12 months, despite a slowing economy.
The theory has been raised by politicians in Washington and by a slew of OPEC producers who blame speculators for the wild rally in oil prices.
Speaking before Congress recently, George Soros, a prominent hedge-fund investor, said he believes current oil markets show some characteristics of a bubble.
"I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance, which led to the stock-market crash of 1987," Soros said.
An oil-market crash, however, is not imminent, he maintained.
"The danger currently comes from the other direction. The rise in oil prices aggravates the prospects for a recession."
Jeffrey Harris, chief economist at the Commodity Futures Trading Commission, spoke before another Senate committee last month. He said he saw no evidence of a speculative bubble in the commodity market. Good reasons have produced the jump in oil prices, he said, including a weak dollar, strong energy demand from emerging-market economies and political tensions in oil-producing countries.
"Simply put, the economic data shows that overall commodity price levels, including agricultural commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand," Harris said. "Together, these fundamental economic factors have formed a ‘perfect storm’ that is causing significant upward pressures on futures prices across the board."
Oil prices had been tending toward the down side recently, but took a dramatic turn for the top Thursday, when European Central Bank president Jean-Claude Trichet suggested the bank might raise interest rates. That pushed up the euro against the dollar and prompted investors to buy into commodities to hedge against the weaker American currency. Gasoline prices have also been rising steadily. American drivers are now paying an average of $3.99 for a gallon of gasoline nationwide, according to the AAA automobile group. In many parts of the country, such as California, Connecticut and New York, consumers are already paying well over $4. Diesel costs $4.76 a gallon on average.
"I don’t know how else to say it; this is not a bubble," said Jan Stuart, global oil economist at UBS.
Filed under: money by Fred