Oil surges as investors hunt an ‘anti-dollar’

Output is falling in the non-Opec trio of Britain, Norway and Mexico. Russia’s production slipped 1pc in the first quarter. The cost of developing oil fields worldwide has doubled in three years. The cost of operating an oil rig per day has risen from $200,000 to $600,000 since 2003.

“The system is operating flat out,” said Chris Skrebowski, editor of Petroleum Review. “We have been very lucky for the past few years that there has not been any major war or revolution to disrupt supplies. The market is incredibly tight as it is.”
Societe Generale said the near $30 spike in prices since early February is largely due to money pouring into commodity index funds, now worth some $200bn. Crude has taken on a “safe-haven” role for investors fleeing the dollar, or those betting that central banks will let rip with excess liquidity.

“This is now entirely investor driven,” said Dr Frederic Lasserre, the bank’s head of commodities research. He added that most of the money is coming from pension funds, insurers and other long-term investors. They view the US recession as a mere hiccup in a powerful upward cycle, convinced that Chinese and Mid-East demand will hold up long enough for America to recover. “They are all convinced by the fundamental tightness of the market,” he said.

Hot money funds are also playing a role, trading oil as a sort of “anti-dollar”. Crude is moving in reverse lockstep with the greenback, pushing ever higher (with double or triple leverage) as the dollar reaches fresh lows against the euro. Surging oil prices are in turn stoking inflation, causing investors to bet yet more on oil futures as an inflation hedge. “This has entered a vicious spiral,” Dr Lasserre said.

Telegraph