http://www.alwatandaily.com/ArticleDetails.aspx?id=88226&dt=Sun Aug 29 03:19:29 UTC+0300 2010

http://www.alwatandaily.com/ArticleDetails.aspx?id=88226&dt=Sun Aug 29 03:19:29 UTC+0300 2010

Oil prices affected by several factors, says report

Sunday,29 August 2010
By : Jameel W. Karaki

KUWAIT: The Fed's announcement weeks ago that it will reinvest the principal from maturing agency bonds into treasuries has come as a reminder of the uncertain economic outlook ahead according to a report published by Bank of America Merrill Lynch Global Research, titled, 'Bank of America ML Commodities - Global Energy Weekly: Oil and the Fed' dated Aug.12, 2010, authored by the Global Commodity Research Team at Bank of America Merrill Lynch Global Research.
The report reaffirms the perception that there has been a change in company and consumer preferences in their demand for credit. Despite the best efforts by central banks in developed market economies, easy monetary policy has not translated into increased lending in the OECD (Organization for Economic Cooperation Development Countries). However, continued capital outflows to European Monetary System (EMS) suggest that investors see opportunity there.
The report highlights the fact that real interest rates are more relevant to oil prices than gross domestic product (GDP) with an assumption that oil demand is directly linked to changes in GDP, oil price levels are not determined solely by physical supply and demand. The report suggests that real interest rates are more important than GDP to oil demand. It estimates that a one percent reduction in real interest rates will result, other things being equal, in a 3.8 percent increase in long-term equilibrium oil prices. In contrast, a one percent increase in the GDP of advanced or emerging economies will impact long-term equilibrium oil prices by two percent and one percent respectively. Thus, while economic activity is no longer expanding at a rapid pace, oil prices may depend more on monetary policy than GDP changes.
If the analysis in the report is correct according to the writer, oil prices could hold up better than demand over the next 12 months. Just like gold, oil is also a hard asset and ultra loose monetary policy which involves lower interest rates and more money entering circulation, will ultimately come in to support nominal US dollar prices. In economics, nominal values are the face value of currency over long periods of time (years), whereas real values have been corrected for inflation.
According to the view of writer, Even if cyclical conditions deteriorate further and oil drops to reflect it, super-easy monetary policy will push oil price levels straight back up in the medium term. Sometimes oil leads gold, and sometimes gold leads oil. But if the value of the key reserve currency is eroded through monetary easing, commodities will reflect this trend. So, even if a down cycle temporarily sends oil below $65 barrels, the upward trend in the US dollar size of key emerging economies should support prices next year.
It is worthy to mention that other factors may affect oil prices such as the Organization of the Petroleum Exporting Countries (OPEC). Also, oil prices are driven by global changes in supply and demand along with a number of other geopolitical factors. Worldwide oil production is controlled by OPEC and the organization aims to maintain a stable price-per-barrel for crude oil.
In addition, political instability in the Middle East especially in Iraq and Iran has caused great concern about access to oil given that this region accounts for a large amount of the world's oil supply. One of the main reasons that oil prices rose so precipitously during some periods was due to the fact that suppliers were unable to convince buyers that they would be able to maintain and properly deliver o