Wednesday, June 04, 2008

Oil Prices: Suprise again

The forever rising oil prices have continued to throw up surprises in the face of analysts who talk as if oil tells them every morning where it is headed. The surprises are not only limited to the course of the price movement, but its speed, its impact on economy and its inflationary expectations.

When teh crude started moving from 20$ per barrel people predicted it will go to 50$ and the economy will grind to halt.It will have wide reaching consequences in the industries consuming oil. They even talked about the third world war.

Oil did move to 50 but the much feared impacts didn't happen. People started talking about crude at 80. Some bolder ones said 100. OPil followed suit and economies of the world did largely bore the oil shock well.

Now the analysts changed their predictions. While they continued talking about their next target price (essentially 2X) of 150$. Oil gave them hope by touching 135$. The audacious 200$ oil folks were found smiling.

However, the impact of rising oil prices began to show its impact. It happened very silently. It happened in direct impact on inflation and secondary impacts through rising prices of few food items which started feeding oil guzzling cars rather than hungry mouths.

As we talk about the 200$ oil, I'm getting signals which suggest that oil may surprise people once more. It may correct to as low as 70-80$ per barrel in coming 12 months. However by this time the damage would have been done and the economies of he world would have shaved 2-3% in their GDP growth rates.

In find the fears about oil running out or rising from this levels completely unfounded. They ignore the basic laws of demand and supply. The day oil starts hurting growth, it will lose the steam which was driving it so far. The seemingly unstoppable engine of crude oil prices is about to stall in its upward journey and will hurtle backwards under the effect of its own gravity.

Good times will be back soon.