WHY OIL PRICES ARE GOING UP?

Got this in my email today, so thought it would be useful to share it with this blog readers.

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WHY OIL PRICES ARE GOING UP?

The oil prices have rallied from a dip below $50 at the start of 2007 and this year have risen to $139 in june. The balance of demand and supply is tight with daily demand of roughly 86 million barrels per day, almost the same level as daily supply. The following are other major factors that have driven the oil market higher.

DOLLAR WEAKNESS AND FUNDS
A combination of weaker performance in other asset classes and expectations of continued strength across the commodities complex has drawn in investors and speculative funds, providing further support for the market.An added incentive for them has been the weakness of the dollar against other major currencies, which makes dollar-denominated commodities relatively cheap.They are also seeking an inflation hedge, as commodities tend to rise when other asset classes fall and the funds have been flowing in Crude, Gold, Silver and other commodities reaching over $250 Billion in May 2008.

OPEC
The Organization of the Petroleum Exporting Countries (OPEC) has been at the forefront of those citing speculation and a weak dollar as the reason for higher prices, saying it is pumping enough oil to keep the market balanced. Saudi Arabia, the biggest OPEC producer, is expected to raise output close to 9.5 million barrels per day (bpd) in June up from around 9.1 million bpd in May. OPEC has not officially increased output since a meeting last September and has no plans to meet formally until September 9.

DEMAND
There is mounting evidence high prices have begun to erode demand, but continued growth in China and other emerging economies is expected to offset the impact of any fall in developed countries.While high taxes reduce demand in some developed economies, subsidies spur consumption in emerging economies. In the developed world, some governments are considering reducing taxes, while emerging economies, struggling with the growing burden of subsidies, have started to lift them.

REFINERY BOTTLENECKS
Even if there is plenty of crude to meet demand that does not mean there is an adequate supply of refined products, such as diesel and gasoline, as there is a lack of refining capacity. Faced with planning battles and reluctance to invest in the downstream sector, which is not always profitable, the world's biggest energy consumer the United States has not built a new refinery for decades.

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