This is one of the best movies I have watched recently in which the actor, Brad Pitt suffers from reverse growth. That is, he is born old and as time passes by, becomes younger every passing day. A strange phenomenon; something of the sort we are seeing in the world markets these days, especially in the crude oil markets.  The million dollar question for the day is-why is crude oil rising despite the sorry state of the world economy?

Yours truly will now make a feeble attempt to dissect the real story here. We are currently in a world of chaos where governments have lost their credibility and the balance of power is shifting from the west towards the east, currencies are no longer perceived trustworthy and people are swayed more by speculation arising out of fear rather than cold hard truth. The truth being; the world is still in a mess of epic proportions and while it seems to have gotten better, it hasn’t quite yet matched the expectations or the efforts put in place by the concerned authorities worldwide. This has had a direct impact on the world economy, resulting in huge unemployment figures in major economies, weak manufacturing and industrial activities and growing trade deficit among the economies. While these reasons should have acted as a catalyst for crude oil to decline, nothing seems further from the truth. In fact, crude oil has increased in the last 2 months and just reached 3 month high prices last night (16^th August 2012).

The major reason for this seems to have been the hope given by concerned authorities that they will do whatever it takes to spur their respective economies. People have been seen praying on that hope, thus lifting prices. Investors worldwide are expecting another round of quantitative measures in the U.S. and in Europe too. They hope that these measures should spur the economic activities, increasing demand for crude oil. But at the moment, these hopes remain just that, hope! Likewise, Middle East tensions are given as another reason for crude oil price rise, especially sanctions to Iran which is one of the largest OPEC nation to produce crude oil. While Iran sanctions would hamper crude oil production, I do not feel it would affect crude oil prices, especially considering that other OPEC nations, especially Saudi Arabia are ready to increase their crude oil output to offset Iran productions.  Of course, one can always argue that economic activities are getting better in the U.S. and even in euro, especially in Germany. These arguments are mostly based on the weekly economic data coming out of these nations. But as investors, we need to look at the long term picture. The weekly report doesn’t paint the exact picture as the data that is coming out sometimes is good and sometimes bad. It seems as if the governments are almost playing with the general mindset to maintain their positions in the government.

Some of the longer term pictures paint a bleak outlook of the world economy. OPEC, which is the largest oil carteling body in the world, recently released its monthly oil market report which showed demand decreasing in the coming months and next year too. Similarly, the crude oil inventory report released in the US every Wednesday shows inventory declining, but a more important thing to consider here is that the inventory is STILL in the upper range for inventories at this time of the year. This means, the world’s largest consumer of crude oil has higher inventory of crude oil than it is supposed to have for this time of the year. Unemployment on both sides of the Atlantic, in the U.S. and euro zone is at their highest levels and shows no signs of coming down. With high unemployment, people are willing to spend less which basically translates to lower consumption leading to lower industrial production which means less demand for crude oil, thus pressuring crude oil prices. Thus it seems in the long run, crude oil prices should come down, but then again, that’s just my opinion!

Note: The blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.