Oil Energy Money

Oil prices surged nearly $6 on Friday, the largest single day gain in history.  The boost reversed two weeks of declining prices and was fuelled partly by Morgan Stanley analyst Ole Slorer’s prediction of $135/bbl prices by July 4th.

“We are calling for a short-term spike in oil prices,” said Slorer in New York, blaming a 35 million barrel decline in US inventories, Middle Eastern production and Asia’s voracious appetite.  His comments echo Goldman Sachs analyst Argun Murti, who last month predicted a $200 super-spike. 

Their reports have been accused of being self serving, especially Goldman Sachs which invests heavily in the commodities sector.  That criticism isn’t especially valid, Slorer was only one of the reasons for Friday’s increase.

The dollar’s plunge was fundamentally responsible, and it was in turn fuelled by two major causes-the highest jump in unemployment rates in 22 years and a hint of higher interest rates in the Eurozone.

Unemployment hit 5.5% in the United States, roughly 49, 000 jobs lost.  This raised fears of a recession which were already high following Thursday’s report by the Mortgage Bankers Association that the number of foreclosures on sub-prime mortgages rose to 195, 000.  Worse still, foreclosures on non-subprime mortgages rose to 117,000.  This was bad news for the dollar, and the news from Europe didn’t help.

Jean-Claude Trichet, head of the European Central Bank, discussed the prospect of higher interest rates in the euro zone.  This would serve to decrease imports of American goods, and the Euro rose further against the dollar.  This was a huge influence on the Friday’s price increase as traders bought oil to hedge against a weak doller.  Olivier Jakob of Petromatrix summised that “Trichet has managed what no war, no hurricanes, no OPEC has ever managed to do.”

It’s rare for such gains without supply concerns, in fact, last week brought news of increasing oil stock piles and better fuel management in developed countires.  Today, prices have fallen by more than $3 and Oil Energy Money would summise that they continue to do so.  Slorer’s report is interesting as a hypothesis, but this is the man who claimed, in a 2005 CASS Business School presentation, that Iraq would be a wild card and that the “Next $10/bbl move [is] overwhelmingly expected to be down”.

$150 is scary, but highly unlikely in the next three weeks.