How low can oil go?

Fundamentals are in place to support the oil price above US$60 a barrel, says economic analyst.

Commenting on the immediate prospects for the oil price, and its likely impact on inflation and the wider economy, Adrian Pankiw, an economic analyst at Henderson Global Investors notes that ‘The price of Brent crude oil is up 13 per cent since the beginning of the year and recently hit a record US$79.64 per barrel, before easing again. The price of petrol has had a similar run. The velocity of the recent run-up was mostly due to large speculative inflows and was quick to unwind in the most recent market rout. However, the fundamental backdrop for both crude oil and petrol prices remains supportive.’
He points out that ‘Demographic trends argue that oil consumption is poised to continue rising on the back of higher demand from emerging economies. China, which currently accounts for 8.5 per cent of global demand, has already become the most important marginal consumer of world energy, and this trend looks set to accelerate. At the same time, while global oil production, excluding the OPEC cartel of countries, has grown close to its historic average in recent months, the cartel’s production has been falling in year-on-year terms. The net effect has been a tightening of global supply, as OPEC still accounts for around 40 per cent of global production.’

‘So far, oil and petrol prices have had a limited effect on inflation and output growth in aggregate, but while consumers’ expenditure on energy as a percentage of their disposable income remains elevated, non-energy spending will be under pressure.’

What Investment