Straits Times 22 Feb 08;
Dramatic rally due to funds rushing into commodities to hedge against inflation
OIL prices are reaching record highs above US$100, and some experts say they may continue to go higher and higher.
The price of crude went above the US$100 mark again on Wednesday, hitting a fresh high of US$101.32 on the New York Mercantile Exchange. It ended the day at a record close of US$100.74 - a dramatic recovery from a low of US$86.24 only two weeks ago.
The rally has caught many investors by surprise, given the clear deterioration in the global economic outlook, especially for the United States, the biggest consumer of oil.
Crude prices are now hovering near the all-time inflation-adjusted high of US$101.70 recorded in April 1980, a year after the Iranian revolution, the International Energy Agency said.
To explain why oil prices are gushing up, analysts said funds were rushing into oil and other commodities like gold and other metals as a hedge against inflation, drawing in momentum traders and exacerbating price pressures.
'It has almost become self-perpetuating. People are buying because people are buying,' said Mr Jim Ritterbusch, president of Ritterbusch and Associates.
And, while US economic data, released on Wednesday, painted a gloomy picture for oil demand in the world's biggest consumer, investors appeared more focused on worsening inflation.
The US consumer price index rose faster than expected last month and for the second straight month.
The US Federal Reserve, meanwhile, lowered its economic growth forecast for this year, raising fears that the world's biggest economy is heading into stagflation - when growth slows and inflationary pressures persist - but lifting hopes the central bank would cut rates further to revive the economy.
'That's another reason why oil's been so strong. Markets have been pricing in another interest rate cut. This will weaken the US dollar and is bullish for US dollar-denominated commodities,' Mr Ritterbusch said.
A host of supply risks also lent support to prices, including US refinery problems, the row between Venezuela and Exxon Mobil and expectations that the Organisation of Petroleum Exporting Countries will hold output levels steady or even reduce them when they meet next month.
On the demand side, there are no reliable figures of oil demand from China, but investors pushing up prices anticipate that the need for oil from emerging economies like China and India will make up for falling demand from the US.
Rising volatility in credit and equity markets has also fuelled a significant increase in investor inflows into commodities this year.
'The oil complex is benefiting from fundamentals and money flows,' Mr Adam Sieminski, chief energy economist at Deutsche Bank, told the Financial Times. 'Investors are looking for a place to put their funds where they don't have to worry about sub-prime. The move above US$100 is likely to reverse but selling oil keeps proving to be bad advice.'
Still, some analysts are warning of a speculative bubble building up in oil prices. They are keen to draw a distinction between the factors that raise the oil price because they affect sentiment and the ones that genuinely affect supply and demand for oil. They say price rises due to the former are vulnerable.
Mr Mark Lewis from Energy Market Consultants told the BBC: 'It's like the dot.com boom in the 1990s. It was overinflated, but as long as everyone kept believing in it, the price went up. When they stopped believing in it, the price went down. And that's a warning.'
