The air thins above 100 dollars

Gábor Szabó
Equity Portfolio Manager

After two and a half years, the price of Brent crude is once again being quoted above the psychological barrier of 100 dollars per barrel. On the one hand, the reaching of the 100 dollar level chimes with our medium-term analyses following the disaster in the Gulf of Mexico, with the significant difference, however, that it happened a good deal more quickly than we had expected, and as such the increase was due less to declining yields from oilfields than to inflationary and political fears. Of the current events precipitating the ongoing price rise, a number of factors are making a return, such as those that led to the soaring of the price to 147 dollars per barrel in the summer of 2008. Witnessing the dynamic of the price increase, some economic players fear that it heralds another hot summer on the oil market similar to that of 2008; at the same time, in their judgement, there are significant apparent differences between the situation in 2008 and the current circumstances.

Looking at things purely on the basis of cost models, even oil prices in excess of 100 dollars might have seemed unjustifiably high two and a half years ago, and yet it must be said that in the summer of 2008 there were more short-term conditions in place than at present prompting a further temporary price rise once the 100 dollar mark had been reached. The cost models have been overridden by the low level of free capacities, while China’s demand for oil has increased due to state-regulated low prices of fuels and anticyclical government growth stimulus programmes. Aggravating these circumstances, the US has begun pumping an unprecedented amount of liquidity into the frozen financial system, while in the Middle East the spectre of armed conflict between Iran and Israel has emerged, a combination of factors pushing the price of crude to historical highs.

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