Saudi Arabia’s oil minister Ali al-Naimi is talking up $150 barrels of oil, because it’s only a matter of time before the price comes back to earth, writes Liam Denning in Heard On The Street.
The price of oil based on the build up of inventories should be much lower. That would slaughter OPEC’s revenue on a year over year basis. It could cut inventories to jack the prices, but it doesn’t need to now that investors are buying up oil:
Luckily for OPEC, it has a helping hand. In the recent market rally, investors have targeted commodities as a hedge against the risk of inflation. Investment dollars bid up the price of futures relative to spot prices. This premium makes it profitable to store physical barrels and sell them forward, hence high inventories.
“Fundamentally” negative demand and inventories data should be killing spot oil prices. Instead, expectations of inflation and lower investment in new supply prop them up.
It is a risky bet. OPEC’s spare capacity is rising and economic recovery is likely to be slow, hence the need for cheap money. Once this becomes clear, or storage space for oil runs out, carrying crude will become less profitable and inventories will be liquidated. Prices could fall sharply. The one-year forward Nymex crude contract’s premium over the front-month contract has narrowed since April. That is reason enough for OPEC to ratchet up the rhetoric.
While Denning’s analysis makes sense, we’d point out that China’s demand for oil returned in April. If that trend continues, then oil could keep on rising.
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