Crude oil has bounced since February to almost $60 a barrel despite worsening fundamental data:
“Commercial inventories are overflowing, having risen in the first quarter, a period when they usually drop. Moreover, as oil prices have risen, OPEC's discipline has started cracking, with the cartel increasing output last month for the first time since August.
Bulls point to resilient demand in China. Yet, as Lombard Street Research and the IEA point out, China's rosy official economic-growth data doesn't square with falling trade volumes and oil consumption, or even inflation numbers.
Oil is really floating on cheap money. Quantitative easing is, as intended, pushing investors towards riskier asset classes such as equities, high-yield debt — and crude. Investors in oil funds push up futures prices, making it profitable for others to store crude and sell it forward; another reason inventories are high.
When these are liquidated, crude prices will likely fall fast, absent a “V”-shaped economic recovery, which looks unlikely. Indeed, in supporting commodities prices at the expense of consumers, central-bank policy risks unleashing stagflation, not reflation.” See WSJ: Crude floating on cheap money
As in 2007, recently oil has again been the beneficiary of faltering confidence in the US dollar over the past couple of months. A resumption of risk appetite since March has taken capital away from the U$ and virtually zero return treasuries and back to more volatile assets. This has caused a spike up in equities and oil prices despite slumping demand caused by the world recession.
But since this oil spike has once again been caused by rather speculative factors–the rejection of the fear trade– we should be prepared for a reversal of this fortune again should another wave of world fear pick up. Buyers should be careful.
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