3/17/2010
By Conley Turner, Research Analyst

More Articles by Conley Turner

The Brewing Sino US Trade Dispute

Inflation In Our Future

Crude Realities

The price of crude oil has risen steadily over the past several weeks to breach the resistance level of $80 per barrel.  The question now is whether or not this most recent move will hold or falter like it has on a number other occasions when the price of crude oil faltered after similar moves. Given the improving economic conditions in the US and the rest of the world, the chances are that this time around, the rally will hold.

Recent data from the U.S. Department of Commerce and other similar government agencies point to a domestic macro economy that is steadily improving.  This is occurring even as the level of unemployment in the U.S. continues to be at an elevated level.  Oil as a result has broken out of its  $70 to $80 trading range and the upside momentum and take it to the $90 per barrel area within the next 12 months.

Though actual demand for oil in the U.S. has not yet picked up to reflect the improving economic environment, the outlook by many observers is that this will eventually change.  First of all, the onset of the summer driving season in the U.S. will likely be a contributing factor.  Pent up demand to drive will likely be evident particularly the North East of the U.S. where the winter has been especially brutal.  As such, even though the national unemployment figure remains high, the expectation is for the seasonal bump in demand for crude and its derivatives.

Turning to the global level, the International Energy Agency (IEA) recently forecasted a 1.6 million barrel per day increase in world oil demand this year versus 2009.  The surge in economic activity occurring in a number of Asian countries coupled with the ongoing strong pace of growth in China have been cited as the drivers of this impending demand spike. The World Bank has recently forecasted that the Chinese economy may grow by close to 10 percent in 2010.  The Paris based IEA anticipates that China alone will account for about one third of the total global demand for oil in the coming year.

Another factor pointing to the sustainability of current oil prices is the dynamic nature of the geopolitical environment.  The situation with Iran remains a simmering issue that can flare at any moment.  Also, after a brief cease fire, Nigerian rebels have resumed their attacks on that country's oil installations causing further disruption in the country's oil producing capacity of the tenth largest oil producer in the world.  Nigeria is also the third largest producer in all of Africa.

The secular weakness of the U.S. dollar  will serve as a supportive factor for oil prices in the long run.   Oil and other commodities priced in dollars maintain an inverse relationship with the value of the dollar.

These aforementioned factors point to oil prices trending higher over the long term.  Trading on a day to day basis will invariably be choppy as investors react to the vagaries of the oil market.  However, the path of least resistance for oil appears to be up at this point. 

Conley Turner
Wall Street Strategies