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Reason to doubt oil price resilience in 2010

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Commodity speculation with cheap money, emerging market demand and a weaker dollar have helped to keep oil prices higher than they should have been in a recession during 2009. There is good reason to think these forces will not sustain oil prices next year.

First, we are seeing signs all over the world of a tightening in monetary policy. From Chinese real estate loan restrictions to actual rate rises in Norway and Australia, and even in the US now the talk is of reigning back the stimulus as the economy recovers.

Faking growth?

Secondly, there are increasing question marks over the real strength of emerging market economies. Have they just been faking it for 2009? Stagnant petrol sales in China, for example, hardly square with the reported rip-roaring growth rates.

And certainly much of the government money pumped into China, India and Brazil has gone into inflating stock market and property bubbles of dangerous proportions. Take away the new liquidity and this will implode taking the real economy with it, ask Dubai.

Third, the US dollar appears to have bottomed out and now be on an uptrend (see this article). All commodities are priced in dollars, so when the dollar strengthens then commodity prices fall.

And perhaps a fourth reason to think oil prices might be lower in 2010 is that global demand is still very weak as a result of the impact of the recession on GDP which will now take several years to recover to former levels, even assuming the recession does not turn out to be a double-dipper.

GCC impact

A falling oil price is of course particularly bad news for the Gulf economies. They have been fortunate in 2009 to enjoy an oil price averaging $61.54 to date compared with the $45 in their national budgets. Otherwise the impact of the global financial crisis would have been even worse.

So what if the oil price averaged $40-50 a barrel in 2010? That is not going to be catastrophic. The price band in the early 2000s was $22-28. But equally it is not very good news for the places like Dubai which have been hardest hit by the recession.

The present big spenders – Abu Dhabi, Doha and Saudi Arabia – are always liable to trim their plans back if the oil price takes a tumble, and that is a reasonable expectation for 2010, unless inflation emerges and renews interest in oil as an inflation hedge.

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Written by Peter Cooper

December 21, 2009 at 9:00 am

One Response

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  1. You literally have to wait in line to be able to buy a Louis Vuitton Bag at Hong-Kong’s Tsim-Sha-Tsui shop. If we could upload attachments here I would attach picture. The line outside the LV shop in Hong-Kong has any where from 10-50 people outside as if Louis Vuitton was giving away bags or some new blockbuster movie from Hollywood was out and to top it off they have like 4 registers open ringing up people with any where from 3-5 people in line through out the whole day.

    In what other country can you see lines like this buying bags and accessories in the thousand of dollars? More then 60-70% of the buyers are from mainland China. The icing on the cake is that they don’t just walk out with 1 bag either but huge bags in each hand.

    When the lines of shoppers in Hong-Kong start vanishing and Hotel Occupancy rates start dropping I will believe that the economic growth rate in China is dropping. A 24 year old friend of mine from China who lives in California has just bought a new Lamborghini along with 5 other exotic cars and has 4 houses in the Los Angeles area. I know you can see this in Dubai but the difference here is that he does not belong to the royal family.

    Ed Note: you are rather out of date in your view of Dubai – the main buyers of luxury cars are expats with businesses! But your vision from Hong Kong sounds like the top of a bubble to me, like Dubai summer 2008… presumably those bags were all made in China!

    Andy

    December 21, 2009 at 9:50 pm


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