There seems to be a good chance oil prices are going to stay hot

There seems to be a good chance oil prices are going to stay hot By Leah Bower, Special to Gulf News Published: April 01, 2008, 00:41

Summer is just around the corner, along with that seasonal hike in energy prices.

And since the traditional lull in oil prices that comes between winter's cold and summer's heat failed to, er, lull this year - we've seen record highs throughout the last month when the price per barrel should be at its lowest. And there seems to be a good chance that prices are going to stay hot, hot, hot.

We've heard it all before, but Opec and analysts are continuing to beat the "weak fundamentals" drum while prices shoot through the stratosphere.

For now, we can thank the unwelcome combination of the weak dollar and institutional investors searching for a safe haven as stock markets around the world fluctuate.

Commodities have become increasingly attractive as the United States economy officially slips closer to recession and the dollar continues to lose steam.

Witness gold spiking to an all-time high of $1,030.80 an ounce on March 17, and oil following suit with a record high of $111.80 a barrel at about the same time.

Even corn is seeing some record numbers. And with every price dip, talk surfaces that the bubble is bursting and prices will once again stabilise at reasonable levels.

However, if you watch the dips carefully they never go very low and are pretty short-lived.

Sure, oil is down a little at the start of the week. It has dipped a couple of times this year, but never very low and it has always shot back up.

Those investors who've been crowding into commodities also decided to shift gears a little on speculation that the US Federal Reserve might crack down on inflationary pressures, which could subdue the growth in commodity prices.

But all it took was a damaged pipeline in Iraq to send prices soaring last week, despite the fact that an insignificant - compared to overall Opec output - of black gold flows out of the war-torn nation.

There is no question that oil's price is confounding, and even angering, everyone from Opec oil ministers to analysts who keep revising price projections downward, only to see their predictions pushed aside by what many are seeing as irrational investors.

Ali Al Yabhouni, the UAE Opec governor, pointed the finger at speculators earlier this week, telling an energy conference in Dubai that the market has sufficient supply of crude oil, and that Opec is not in the habit of catering to the appetites of investors.

Regardless of how you feel about Opec, and its current policy of keeping oil production at current levels, Al Yabhouni has a pretty strong point.

Why should Opec pump more oil when every indicator points to lower demand in the near future?

Reserves are rising and despite US President George W. Bush's push for more crude on the market, the general consensus is that there is enough oil to go around despite strong demand from India and China.

Every indicator is also pointing to a recession in the United States. Studies show that American consumers are increasingly choosing to spend less as the housing market continues to head downwards, and eventually that will mean spending less at the pump.

Despite these factors, we've already seen the market climb towards and maintain what most analysts have considered an unreasonable price level, ignoring traditional fundamentals in the process.

Energy analyst Stephen Schork even vented to the Wall Street Journal that oil's rise proves "once again that markets can remain illogical far longer than you or we can remain solvent."

- The writer is a freelance journalist based in Alaska, USA.