With a bout of speculative activity yesterday driving Brent crude to within a few cents of the record $78.65 of last summer, Goldman said that shortages of supply were behind the steady rise. However, the price later dropped to $77.63 and a decline in petrol futures led New York analysts to question Goldman's forecast.
A further rise in oil prices would add to inflationary pressures in developed countries, with some UK analysts fearful that dearer energy increases the risk of at least one more quarter-point increase in base rates from the Bank of England.
Despite recent declines in North Sea output, Britain's status as an oil producer has been a contributory factor in the recent rapid rise in sterling against the dollar. The pound yesterday exploited nervousness about further fallout from the US sub-prime mortgage crisis to climb above $2.04 for the first time in more than a quarter of a century. Analysts in London were looking to today's inflation figures for June, and tomorrow's release of the minutes of the meeting this month at which the Bank raised borrowing costs to 5.75%, to assess the chances of what would be a sixth increase in bank rate since last August.
Jonathan Loynes and Paul Dales, at Capital Economics, said in a report yesterday that the recent climb in oil prices and dearer food had placed a question mark over the Bank's forecast that inflation would fall sharply. "The recent further increase in oil prices and the potential stickiness of food prices suggest that previous expectations of a sharp fall in UK consumer price inflation over the coming months may now be disappointed. This could add to the upside risks to interest rates."
Sterling has passed $2 in recent weeks amid expectations that interest rates in Britain have further to rise, whereas US short-term borrowing costs have peaked at 5.25%. The last time the pound was at its current levels against the US currency was in early 1981, when the Thatcher government was using high interest rates to tackle inflation and oil prices were high as a result of the Iran-Iraq war.
On the foreign exchanges yesterday, the dollar fell across the board, suffering particularly against currencies such as the pound and the New Zealand dollar where interest rates are high. Sterling peaked at $2.0405, but slipped back to $2.0367 in late afternoon trading. Investors are concerned that weakness in the US housing market could spread to the rest of the economy and force the Federal Reserve to cut interest rates. Ben Bernanke, the chairman of the Fed, is giving testimony to Congress tomorrow on the state of the economy, but is not expected to signal an early cut in rates.
Wall Street was last night awaiting a statement from the investment house Bear Stearns on the losses suffered by investors in two of its hedge funds exposed to the sub-prime market to assess the risks to the rest of the financial sector.
In the energy market, a wave of speculative activity pushed Brent crude to $78.40 before profit taking saw it fall back. Goldmans said Opec production was a million barrels a day down on last year while demand is strong. "We believe an increase in Saudi Arabian, Kuwaiti and United Arab Emirate production by the end of the summer is critical to avoid prices spiking above $90 a barrel this autumn," the investment bank said. "Our estimates show that keeping Opecproduction at current levels and assuming normal winter weather, total petroleum inventories would fall by over 150m barrels or 6.5% by the end of the year, which would push prices to $95 a barrel with a demand response."
Opec yesterday sought to calm increasingly frenzied global energy markets when it predicted world demand for oil would grow only modestly in 2008. It downplayed the need for extra production, citing greater energy efficiency, higher taxes and conservation.
Via: The Guardian
by Larry Elliott
