Will we see oil price exceed US$100 in 2011?

Oil seen hitting US$100 a barrel this year

Will we see oil price exceed US$100 in 2011?

Quite likely, say analysts, as more quantitative easing by the US Government, coupled with strong demand from India and China drive oil prices to the three-digit level again.

In 2010, base metals took centre stage with most industrial commodities and precious metals trading at, or near record highs.
 
Oil prices, however, were not in the spotlight and had a relatively benign year.

The benchmark West Texas Intermediate (WTI) spot price of crude oil began the year at $81.74 per barrel, slipped to a low of US$64.78 in May before climbing to to an intraday high of US$91.88 on Dec 27. (Oil closed at the highest level of US$91.63 on Dec 23). Thus, oil has increased only 13% this year.

Nonetheless, oil prices have jumped almost 30% since September.

Some say the current rally set in around September after the US Federal Reserve embarked on its latest quantitative easing (QE), which triggered a wave of buying in financial markets across the globe.

(QE refers to the Federal Reserve's efforts to jump-start the economy and stave off deflation by buying back US$600bil in Treasury bonds, hence putting more money into the system. Some analysts are watching what happens next, after the current bout of QE stops sometime middle of this year).

However, there are others who believe that oil prices are set globally, and they are rising due to demand from a rising middle class in the emerging markets.

“China has been buying up commodities and resources around the world. It is a matter of time before oil rises again,” said strategist from a foreign brokerage.

Opec's evident reluctance to increase output and the prospect of continued dollar weakness are additional factors in the case for costlier oil in 2011.

In a report by the International Energy Agency, the cold weather had pushed oil prices to two-year highs over US$90 per barrel by early last month.

While some may believe there is a fundamental reason for the price uptrend, not all will agree on its benefits.

Oil is, after all, a major input cost.

“If oil prices continue to go up, it will be more than just higher petrol prices that we have to worry about.

“Everything else will get more expensive. This will result in higher consumer price inflation, which could mean interest rates rising again,” said the strategist.

A fund manager, who felt that there was too much pessimism on the US economy, said oil prices could ease as the US dollar started strengthening this year.

“Oil prices may even go lower. China's energy needs might not be as robust as previously thought. A recent crackdown on bank lending could dampen some of its recovery and its appetite for oil,” said the fund manager.

A Hong Kong-based fund manager expected commodity prices to make their next big move sometime this year,

“Already, we are seeing fresh all-time highs in tin, copper, zinc, and other industrial materials. We are seeing this because of the massive infrastructure development in China and India and the global switch to alternative energy,” he said.

The demand for certain commodities cannot be viewed in isolation, the fund manager explained. This is because one type of commodity may be required to produce another type of product .

“In the push for alternative energy, people use water to generate electricity. To create this alternative energy, they still need existing commodities. They still need to build the dam, which requires iron ore and copper, among others.”

“As copper price rises because of increasing demand, the cost of copper equipment will increase. This increases the cost of mining copper, and eventually leads to higher prices for oil and other commodities as well,” explained the fund manager. - By TEE LIN SAY, Starbiz.