During a week which saw a rally in the equity market, the dollar breaking above 100 Yen again and falling gold prices, all classic indicators of a flight away from oil, why did the price ber barrel remain so high?
The biggest cause is weak American job market data. The Bureau of Labor Statistics report for March put unemployment claims at their highest since July 2004. This was worse than analyst expectations but the markets kept faith in financial stocks, Lehman Brothers , Merril and Citigroup all rose by around 16%.
Unfortunately, the financial sector was the biggest benficiary of market faith. The dollar rose against the Euro during the week due to a slowdone in the Eurozone economy and large writedowns by European banks like UBS. But the jobs market data led many to fear that the dollar’s strengh against the Euro was only temporary.
This fear brought oil to the relatively high price of $106.23 Commodities and bonds are indicators of a ‘flight to quality’, as investors move to less risky assets. Since gold remained low at $105.42 due to weak demand by India, investors pooled in to oil. This should go a long way to explaining the 2.26% rise in oil on Friday. The uncertainty about Gazprom’s aggressive stance towards taking a 51% stake of TNK-BP settled down as sources claim little will happen until President-elect Dmitry Medvedev’s inauguration on May 7th.
Next week, look for the unemployment data to further weaken equities, boosting oil to higher levels. $108 sounds reasonable with the unrest in Zimbabe potentially spilling across to the rest of South Africa. Many hoped the fall of Bear Stearns would stabilise the market and restore investor confidence. Maybe it will in a few weeks once JPMorgan’s intentions are clear, but the markets right now remain on shaky ground.
