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Speculative capital fuels world oil prices
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16:21, June 01, 2009

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The appreciating covet on the international commodity market and the depreciating US dollar against the euro, sterling and yen are probably the biggest influence behind the oil prices on the world market.

Accumulated growth in international oil prices in May reached almost 30%, marking the largest increase in 10 years. On May 29, the last trading day of the month, New York crude oil futures prices closed at 66.31 USD a barrel , double the lowest prices in December last year when the price was about 32 USD per barrel.

Financial factors may still be the main reason for the sharp rise in international oil prices. Expecting the international financial crisis may have bottomed out, investors and speculators have swarmed into the commodity markets, including oil. And as a result of the recent fall of the value of dollar against the euro, pound and the Japanese yen, dollar-denominated oil prices are rising.

The fact that international oil prices' have bounced back from the bottom is not a surprise. However, given the current international financial crisis is still spreading and the world economic outlook remains uncertain, there is enough reason for concern over such a rapid rebound in international oil prices.

Like any other products on earth, the relationship between supply and demand is the basis to form oil prices, which can be referred to as "the basic price".

Second, financial factors in the market drives "nominal price", which often contains bubble components and is referred to as the "bubble price ".

Third, unexpected events and geopolitical factors can also lead to changes in oil prices, and that can be referred to as "risk price."

Judging from the "basic price", the current global demand for crude oil is slightly lower than the same period last year. Economic recession in major developed countries curbed demand for oil consumption. From the aspect of "risk price ", there were no major geo-political incidents in the recent period that can influence oil prices.

As a matter of fact, neither buyers nor sellers alone can decide oil prices due to the increasing diversification of both oil production and consumption. In contrast, speculative capital has been gaining ground on the international oil market.

Although international oil prices are not likely to continue rising sharply during the year, too big a financial element in the oil price mix will make future oil prices unpredictable.

At present the world maintains an extremely relaxed monetary policy with benchmark interest rates of major currencies standing at nearly zero. In that context, once enormous capital enters the oil market, a new round of oil price bubble is apparently predictable.

OPEC Secretary-General Abdullah al-Badri warned a few days ago against speculators' unwelcome role in oil prices.

According to the estimation of Britain's Financial Times, on the basis of the average oil price last year at 100 USD a barrel and the world's daily oil consumption about 88 million barrels, the total annual cost is 3.2 trillion USD. If the average oil price this year falls to 50 USD a barrel, 1.6 trillion U.S. dollars can be saved in one year.

Then there is no doubt that the soaring oil price will offset global economic stimulation efforts and cast a new shadow for the world economic recovery.

By People's Daily Online


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