Liquidity, Weather Pushes Oil Prices To Two Year High

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Blame  it on the additional liquidity brought about by QE2  or on the inclement weather that sealed off large parts of Europe under  the ice blanket ,oil prices that have been steadily climbing over the past few weeks broke the price barrier of $90 per barrel for the first time since 2008. Commodity and currency markets along with Wall Street have been unusually buoyant ever since the US Fed confirmed that the quantitative easing would continue till middle of 2011. Whereas their has been unusual volatility in the currency market and Oil, Gold, Cotton all have risen sharply , so have  future prices of metals and agriculture commodities.




The recent oil price rise has  very little to do with  the demand and supply of oil or with the stock levels at Cushings which is 12% higher this year than last year despite demand remaining constant. Besides large storage capacity has been added in both US as well as China in the current year as both nations which consume nearly 60% of the world's crude oil and gas stockpiled heavily.

As per a recent Reuters report Natural Gas which has been much in demand for heating in North America is also adequately available with shale oil adding to the comfort level. Though BP goodwill and business was hit severely after the  Gulf of Mexico disaster in the US ,it still remains the largest stockist and distributor in the US both in Gas supply and Crude Oil Storage. The EIA estimates of proven natural Gas reserves were 16% higher at 244.7 trillion cft than that estimated by BP as recoverable. BP held 3.07 billion barrels of crude oil and  15.2 trillion cft of natural gas reserves in the US prior to the Macondo explosion.

Demand in the US crude was almost 29% lower than last year with just 460,000 lots traded this Wednesday as against 627,808 lots traded last year. As against this US stockpiles rose by 1.03 million barrels to 358.6 million barrels. In freezing Europe,  oil demand due to heating did not pickup greatly thanks to the  depressed mood due to the Irish debt crisis and the pressure on the Euro. China too suffering from inflationary pressures cut back  on liquidity and eased out their perpetually high demand of crude, which has been  higher by 30% for long periods this year.

So why are oil prices climbing and have gone above $90 /barrel. ? Investors have been sold on the idea that oil is an asset class commodity on which appreciates quickly and is a shortage item due to peak oil conditions
With banks integrating operations across money markets and moving large funds across the globe with high speed computers , speculation in most commodities have been rampant as investors have been hyperactive. Governments are still not alert and moving extremely slowly as the cold white winter that can create havoc due to disruptions in the supply chain has been threatening to engulf Europe. If action is not taken against speculation in oil immediately, this could be a winter of discontent where thousands could suffer from the effects  of   the white winter and spiraling energy prices.