Will oil keep rising?
Mar 27th 2009 7:00AM
Updated Dec 3rd 2009 10:26AM
Oil has been hovering above $50 for over a week. The argument that it won't go higher is simple: The recession will keep demand down.
But the case that crude prices will move up may be even more compelling.
For starters, OPEC nations are still in financial trouble. Iran and Venezuela have made it clear that they cannot balance their budgets unless crude is above $70. Saudi Arabia was able to keep the cartel from another production cut at the last OPEC meeting, but if crude moves back toward $40, it may lose its leverage.
The next important argument for higher oil prices is ironic. Low oil prices have stopped large companies from spending money to drill new wells and explore new fields. As crude stays low, getting a return from exploration is hard. The incentives for adding to production aren't there. As drilling and production drop, the supply of crude will shrink.
The last part of the case for higher oil prices is that the recession will end sooner than expected and a recovery will be stronger than forecast. Oil demand could turn sharply up and with supply steady prices could take off. The stock market is certainly sending a signal that the economic recovery is coming soon. Data about GDP in the first quarter and unemployment in March could add fuel to the perception that the economic picture is getting better.
No one should be surprised if crude gets back to Iran's magic number of $70.
Douglas A. McIntyre is an editor at 24/7 Wall St.