What’s behind the spike in oil prices?

February 27, 2012

It’s easy to blame tensions with Iran for all of the recent spike in petroleum prices. But there are other catalysts for the market’s sudden surge. For one thing, U.S. economic data have been consistently surprising to the upside while the European situation appears loosely under control, both factors that suggest the global economy may yet coast along through 2012 without faltering.

Then there are the actual hits to supply taken due to geopolitical events around the world, says Marc Chandler at Brown Brothers Harriman, which in just two months have helped push Brent crude prices more than $20 higher to a 10-month high above $125 a barrel:

There has been a genuine supply shock. Between Sudan, Yemen and Syria, nearly 750k barrels per day (bpd) have been taken out of production due to political instability. On top of this Libyan oil output is about 600k bpd below pre-civil war levels.

The Iranian confrontation and its response (to cut sales to the UK and France) has also taken supply out of the market. The bellicose rhetoric and fear of an escalation raises the risk premium as well. There are other, less significant supply disruptions. Aging infrastructure has seen North Sea output decline. Venezuela output is also lower.

There is also a role of increased demand. Japan, for example, is replacing some of its nuclear energy with oil. Its oil imports appear to be running about twice pre-tsunami levels. In addition, there has been some pick-up in demand from Asia. Note that the IEA forecasts oil consumption to rise 830k this year after a 740k bpd increase last year. The unusually cold European winter is also thought to be boosting demand.

Yet global markets are strangely circular: the very economic optimism that is sending oil prices higher could actually be dampened by the harsh reality of higher energy costs. Already, stock markets were taking a hit on fears that the increase in crude costs would derail the global recovery.

As Chandler notes:

Investors are well aware that most U.S. recessions (10 of past 11) were preceded by a surge in oil prices.

 

 

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