What’s driving the rise in oil prices?
The
price of Brent
Crude, the benchmark based on North Sea oil, fell $ 35 between April and
June, but increases since then have taken about $ 25 of that back. According to
many, reports that Israel
will bomb Iran’s nuclear facilities are behind this surge. But do markets
believe that this event is now more likely to occur?
Prediction markets allow
anyone to bet on real-world events, anything from who will
win the U.S. Presidency to whether Bashar
al-Assad will still be President of Syria at the end of the year. Intrade,
one of the largest of such markets, has a contract on whether Iran will
be hit before year’s end. The price of that bet has pretty much stayed constant,
not only in the last couple of weeks, but also during oil’s sharp fall from
April to June and its strong rebound afterwards.
Supply
fears are probably the second most popular reason cited for the rise in oil
prices. Markets could be worried that Iranian
oil sanctions would cause a disruption in supply, but everyone had six
months to prepare before the sanctions came into play.
Regional
supply shortages have been balanced by more production elsewhere. While there
are maintenance-related
cuts in the North Sea, the
U.S. has increased output. As a result, the wedge between Brent and West
Texas Intermediate, the other benchmark, has grown. Iraq
has stepped in to fill the shortfall crated by Iran, and Saudi
Arabia has been pumping record amounts. Overall, production
fell about 1 million barrels per day in June and did not recover in July,
but this cannot account for the entire jump in the oil price.
After
going through similar arguments, James Hamilton, professor of economics at
University of California, San Diego and oil expert, concludes
that “the most important factor driving oil prices recently has been
changing assessments of how strong the world economy will perform over the next
6 months.” He notes that the decline in oil prices
from April to June and the subsequent rebound have mirrored stock indices.
But
economic data since June have been mixed at best. I’d argue that oil has been
supported of late by expectations of easing by the American, European and Chinese
central banks. Those expectations got a boost this week, first with the
publication on Wednesday of the Fed's recent meeting minutes, which suggested
that quantitative
easing may come soon, followed by remarks
from People’s Bank of China Governor that adjustments to interest rates and
banks' reserve requirements were still possible.
This
discussion may help you understand whether or not the recent surge in prices
will be temporary, which could have important local implications. Every Turkey
economist knows that a $ 10 rise in the price of oil increases the country’s
current account deficit by $ 4.5-5 billion. The Central Bank recently noted
that the same $ 10 causes a 0.4 percent rise in yearly inflation.
Much
is at stake here. In its latest assessment of the Turkish economy on Thursday,
ratings agency Fitch noted that it could upgrade
the country to investment grade if the current account deficit and
inflation improve. The likelihood of this happening will partly depend on the
path of oil prices.
