04 March 2011

How far could Oil price RISES?

As usual, another episodes of tension in the Middle East pushes global oil prices higher, and surpassing $100 per barrel this time. We did seen this kind of scenario before in the Middle East during 1973-74, 1979, and the Iraq war in 1990. Are there any different this time?

Libyan leader Muammar Qaddafi

By Credit Suisse
We believe the rise in oil prices is manageable. Each 10% rise in oil prices only takes about 0.1% off global GDP and 0.2% off US growth. With Western wage growth muted, central banks are unlikely to raise rates on account of oil alone.

Our analysts see oil prices below $100 pb this year, supported by the following reason which differs from previous oil crisis:-

  1. There is enough spare capacity in the global oil market to deal with supply-side disruptions as long as they are not too extreme
  2. The energy intensity of global GDP has fallen by around 40% over the past 40 years
  3. There is unlikely to be the same inflationary follow-through as in the 1970s
  4. Oil producers are spending their windfall gains
Yahoo Finance: Oil prices since 28th Feb 2011

Potential Losers
Among the countries that are both significant energy importers and where energy accounts for a large part of the CPI basket, we would highlight India, Czech Republic and Poland. We note that China has the fiscal strength to subsidize higher energy prices, while other countries (namely India and Thailand) may not.

Potential Winners
In our view, the potential winners are countries that are net energy exporters and that have a positive output gap. This highlights Russia, Columbia, Australia, Canada, Malaysia and Norway.


The outlook for oil prices...
We believe that the oil price should fall from here. Saudi Arabia is likely to release some of its oil reserves into the market as it perceives a high oil price to be supportive for the Iranian government. Our house view is that oil price could falls below $100. We would only be concerned if the political unrest in the Middle East were to spread to Saudi Arabia.

* This is just an excerpt from Credit Suisse Research report dated 1 March 2011. This may not informative enough for readers to come to a conclusion.

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