Wednesday, February 23, 2005

Dollar, Euros and Oil

Here is an interesting exchange at Brad Setser's blog
Q: What is the connection between materials prices and relative dollar value? Can we make any sensible connection in the case of oil?
A: OPEC, they certainly have a fair amount of market power, and one theory for the current market price of oil is that they really have a "30 euro a barrel" target ... i.e. the oil sheiks want to keep the price of their summer vacations in Europe constant, in terms of oil. That argument probably has an element of truth in it, though a bit of cold weather and evidence the global demand remains robust also seem to explain the recent run up.

If this 30 Euros a barrel theory is to be believed, and if we take in to account that dollar is most likely to continue its downward slide given the state of the trade deficits, then we might conclude that oil prices will indeed remain at 45-50 dollars per barrel for at least one more year. Very interesting. Stay tuned.

P.S. (02/24): From the FT:
Crude oil futures rose to a four-month high on Thursday after Saudi oil minister Ali Naimi said prices could stay between $40 and $50 a barrel for the rest of the year.
Mr Naimi told CNBC television: “Where the price is today, between $40 and $50, will probably be with us for 2005.” The comments by the Organisation of the Petroleum Exporting Countries’ lead producer will fuel fears that the tight supply-demand picture and high prices are here to stay.

Traders and analysts are divided over the likely length of the current rally, with some predicting it as a short-term symptom of the cold snap and others warning that the supply-demand outlook is fundamentally tight.

This may be an admission that OPEC has now agreed to stop worrying unless oil prices either drop below 40 dollars a barrel or rise too much above 50 dollars a barrel. It may, however, also be an admission that the supply is really in a very tight position, and continued strong demand and other trouble mean that OPEC does not have much control over where the prices are going.

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