Recent rally in oil prices explains recovery story - Investec

Crude oil prices collapsed last July as the largest economy in the world faced its worst recession ever as the housing bubble finally busted towards the end of 2007.

However, this week, as the US economy showed some green-shoots, the price of black gold is again spiking and Goldman Sachs analysts predict it could hit $85 by year end.

However, Investec says it is much more cautious saying a price of $50 - $60 would be fine for the sector.

“Fundamentals do not explain the recent rally in oil prices but a recovery story does. Investors believe that the world is placed for recovery in commodities, in equities and the general economy and therefore oil prices have caught on this positive wave,” Investec Fund Manager Bakang Seretse explained.

Futures investors are again hedging against oil as there are signs of recovery since Barack Obama took office early this year.

Media reports showed that the US light sweet crude rose 40 cents to $69.21, on Friday while London Brent added 30 cents to $69.01.

BBC notes that oil prices have risen sharply from lows of near $30 a barrel, but are still less than half of the peak of $147 reached in July last year.

However, a spike in oil prices is a big gain for futures investors while it is a big blow to consumers and industry as it means spending more at the pumps.

Seretse told Sunday Standard that although oil cartel, OPEC, has cut output by 4 million - 4.5 million (barrel per day) bpd, the recent high prices cannot be explained as demand remains weak.

“OPEC could turn the taps back on if demand picks up and there was somewhere to store the oil,” explains Seretse.

“So it is hard to justify an oil price above $60. We think $50 was fair value for now, rising to $60 when the global economy finally picks up next year,” he says.

The Fund Manager adds that the oil price rally was negligible for sometime in Botswana because there was strong Pula rally on the back of the rand, adding that though that price of oil has increased, 58 percent in Pula terms, it is not the end of the world.

Although high oil prices normally are related to a rise in inflation, Seretse says as for now that should not be a concern.

“Most commodities are still down and, therefore, we should not worry of an immediate risk in inflation,” he says.

“As far as Monetary Policy is concerned, again, Bank of Botswana will take time to get a better understanding of the situation. We should remember that monetary policy does not act in inflation of now but of many months from now. Therefore, the increase in oil prices should be sustained long enough for Bank of Botswana to act on it.”

Investec says it assumes $55 for 2009 and $65 for 2010 before returning to a long-term ‘normalised’ level of $80, and says it sees limited upside to our $55 assumption for 2009 – maybe it could go to $60.

Botswana motorists have been enjoying cheaper fuel prices since last year.

Bloomberg reported on Friday that the U.S. lost fewer jobs than forecast in May.