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Uncharted waters

Oil prices have set new highs at around $110 a barrel and are showing little sign of easing. On Tuesday, US light-crude futures reached a record high of $109.72/b; Brent futures, also breaking new ground, almost reached $106/b.

But, says Stephen Schork, an energy analyst and editor of the Schork Report, it could just as easily be $10/b higher, because the market is being driven by speculators and has become detached from the fundamentals. "There is no end in sight [to the bull-run]. We are in uncharted waters," he says, adding that it would be foolhardy to call the top of the market.

Traders certainly never seem short of a bullish headline: last week, a border war between Colombia and its neighbours, Venezuela and Ecuador, was narrowly averted. This week, Gazprom reduced gas supplies to Ukraine because of a dispute over payment. And while military activity on the Turkish-Iraqi border appears to have ceased, the Middle East and Nigeria remain a constant source of concern.

Other supportive factors include Opec's decision on 5 March not to increase oil supply to world markets. Cold weather and refinery run cuts, meanwhile, have tightened the distillate market, especially in Europe, pushing gasoil prices to new peaks, says the International Energy Agency (IEA); and continued weak refining margins have "raised doubts" about products stocks replenishment.

The persistent weakening in the dollar – boosting demand for dollar-denominated oil as it becomes more affordable for buyers using other currencies – also continues to provide price support. In addition, in its latest monthly oil market report, the IEA suggests recent oil price increases may be partly the result of a general increase of investment flows into commodities, as investors anticipate further weakening of the dollar and an acceleration in inflation.

The rise in prices is happening even though signs of a US recession seem to be increasing in number and frequency, with economic data showing low consumer confidence and a weakening jobs market. Schork claims that the oil market will need to see a "material pull-back" in energy demand in the US and a tangible knock-on effect in demand of the US slow-down in other countries before oil prices weaken substantially.

If and when that eventually happens, the fall could happen much more precipitously than the rise in prices in the last six months.

Price drivers this week:

  • US weekly oil-stocks data
  • Refinery utilisation
  • US interest rates/dollar exchange rates
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