How high can the oil go?
Over the past month we witnessed oil prices rally and hit levels that have not been seen since 2008. 2011 is bringing an air of change to Arab countries as antigovernment protests in Tunisia and Egypt resulted in the resignation of their decade long governments. Protests spread to Libya and other countries in the region. The political uncertainty is attracting global attention as the impact on the world economy is significant. Oil prices accelerated and global growth is at risk. How will this situation end and how high is oil going to go?
Oil markets were the ones mainly affected by the political uncertainty in the Arab world and prices jumped when the unrest spread to Libya. Libya is the eighth largest oil producing country in the world and the political crisis in the region has resulted in soaring oil prices. Libya’s oil industry and shipping sources were paralyzed and the country’s oil exports abruptly dropped. This caused oil prices to skyrocket despite Saudi Arabia saying that it will increase its production to make up for Libya’s loss. Investors fear that the unrest could spread to other countries of the Arab world such as Saudi Arabia or Kuwait deeply hurting oil supplies. Traders around the globe are wondering how high oil can go. The situation in Libya significantly influenced the oil market and caused dramatic changes in prices. Libya is producing about 1.6 million barrels per day of crude oil and the violent situation resulted in a spike in Brent and Crude oil prices. Crude oil jumped to 103.39 dollars a barrel gaining 23 percent within a month due to the geopolitical crisis. At the same time, investors watched Brent oil prices jump 11 percent approaching a record high level at 120 dollars a barrel due to the severe supply outages.
Rising energy prices has been the main driver of the currency markets in the last weeks with the US dollar suffering the most. Record high levels of oil generate inflation pressures creating dilemmas for policymakers. Central banks are considering whether to tighten the monetary policy in an effort to fight inflation. But this poses a risk to the global economic recovery as it still struggles to escape recession. Investors’ fears were not eased even after Fed Chairman Ben Bernanke said that oil’s impact on inflation is mild and temporary. The dollar appears to be losing its yield advantage over other currencies such as the euro. The Fed remains consistent to its Quantitative Easing program and its loose monetary policy. Rising oil prices couldn’t have come at a worse time as economies suffer from slow growth and mounting inflation pressures. If oil prices continue to surge then the risk of stagflation will be high. Stagflation is the situation when there is a simultaneous existence of slow growth and high inflation in an economy.
The situation now is fragile and the future uncertain. If Libyan unrest resumes, the risk of a further uprising in other Arab countries is high. Consequently, oil prices will jump even more hitting levels that can be considered dangerous and may bring major changes to the global economy. Whatever may occur, it is certain that investors will be closely watching oil prices. Trading in the currency and commodity markets will certainly be adventurous and exciting.
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