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How a Fed rate cut raises oil prices

Steve Hargreaves, CNNMoney
Expect even higher crude prices if the central bank cuts interest rates Wednesday.

If you think oil prices are high now, wait till Wednesday.

That’s when the Federal Reserve is set to announce its decision on interest rates. Most say a cut is coming.

“If the Fed cuts rates, it will probably push oil prices higher,” said Adam Sieminski, chief energy economist at Deutsche Bank.

There are a couple of reasons lower interest rates usually cause higher oil prices. The first is lower interest rates are designed to spur economic growth by making money for investment cheaper to borrow. Stronger economic growth usually entails using more energy, so traders bid up oil prices on the expectation of higher demand.

Second, lower interest rates usually cause the dollar to fall, as they make dollar-denominated investments like Treasurys less attractive for foreign investors.

Oil, like many other commodities, is priced in dollars worldwide. If the dollar falls, oil producing nations, like those in OPEC, need a higher price per barrel to maintain a the same level of revenue.
(30 October 2007)

Please don’t blame us for $93 oil: OPEC

Alex Lawler and Peg Mackey, Reuters
OPEC has no power over many of the factors buffeting oil markets and the group is worried by record high prices that are threatening the world economy and future demand growth, OPEC ministers said on Tuesday.

“Please don’t blame us for $93 oil,” Qatari Oil Minister Abdullah al-Attiyah told reporters on the fringes of an international energy conference.

“The market is out of control.”

OPEC President Mohammed bin Dhaen al-Hamli reiterated OPEC would always step in to meet supply shortfalls, but a 34 percent surge in the oil price since mid-August was driven by a flood of speculative investment and international political tensions.
(30 October 2007)

Dr. Daniel Yergin: Oil Prices Becoming Decoupled

Cambridge Energy Research Associates via Rigzone
“Oil prices are becoming increasingly decoupled from the fundamentals of supply and demand,” Dr. Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA), said today in Washington D.C. “With prices over $90 a barrel and strong anticipation of $100, the oil market is showing signs of high fever, stoked by fears of clashes in the Middle East and resulting disruptions of supply. A weakening dollar and anticipation of further weakness add further fuel to the fever,” he said.

Dr. Yergin spoke at a symposium on “The Economics and Geopolitics of Russian Energy” at Georgetown University, sponsored by the university’s Center for Eurasian, Russian and East European Studies.

“What we’re seeing in the oil market today is rooted more in the cauldrons of geopolitics and the impact of financial markets, expectations, and psychology than in supply and demand,” he said, “but these are real factors.” He pointed to major impact over the last two weeks of tougher rhetoric over Iran’s nuclear program and heightened tension between Turkey and Iraq.

“The oil market may be only one or two events away from $100-plus oil,” he said, “and there is much momentum in that direction. The major offset would be in the economic sphere – in terms of a slowing economy and slowing demand growth. But the timing of those effects would not unfold with the drama of events in the Middle East.”

Dr. Yergin cited the overall importance of Russia in global energy markets, as well as its key impact this decade.

“While there has been so much attention around the world to the rapid increase in Chinese oil consumption, the growth in Russian oil production between 2000 and 2006 — 2.9 million barrels per day – exceeded the 2.5 million barrel per day increase in Chinese oil demand over the same period,” he said. “But while Chinese consumption continues to go up, Russia’s increase in output is flattening out rapidly owing to swiftly rising costs and very high government taxes on oil production.

“Although publics and governments around the world are focused on prices, one of the most important factors in the world oil industry is the rapid rise in costs owing to shortages of people, equipment and skills,” he told the Georgetown University conference.

Citing the IHS/CERA Upstream Capital Cost Index, he said that a new oil project today would be priced at 70 percent more than a project that was launched just three years ago. “The increased costs are leading to delays and postponements of oil and gas projects,” he said, “which is affecting the timing of future supply.”

Dr. Yergin observed that natural gas has become “arguably the most contentious issue” between Europe and Russia, which is the world’s largest producer of natural gas and the major exporter to Europe. He commented that CERA’s new study, Securing the Future: Making Russian-European Gas Interdependence Work, shows that there are “structural reasons” for the tension, owing to the major changes in Russia, Europe and the international gas market itself over the last decades.

He also pointed to the estimates of the U.S. National Petroleum Council that world energy consumption is likely to increase by 50 to 60 percent over the next quarter century. “Meeting that demand in an environmentally-sound way will be a very major challenge for all energy-producing countries, including both Russia and the United States,” he said. “And the results will have a decisive impact on how nations define their energy security and what they do about it.”
(29 October 2007)