Oil Prices - (16.05.04)

Have oil prices peaked or will $50 a barrel be seen in the near future? The first point to make is that the UK is sheltered from the effects of the oil price rise by the current strength against the dollar. Without this the economic effect of the price increase would be far higher, and not just on consumer behaviour at the petrol pumps. One of the main reasons for the recent increase in oil prices is the structural deficiency of the US economy, it's dependence on oil for recovery and uncertainty over supply forcing the market upwards. It is this structural weakness, particularly the budget defecit, that is causing the dollar weakness and the recent increases in forward interest rates worldwide.

For this reason the peak in oil prices may not be sustained. Since September 11th 2001, economic sentiment in the US has swung between optimism and pessimism and normal market balancing factors have often resulted in an exaggerated reaction to individual pieces of economic news. Therefore if we follow the recent experience of these reactions, there should be a fall in oil prices back down to below $25 a barrel before stabalising between $25 and $30, where it was before the current increase started.