Oil surged to its highest level yesterday since May, as analysts said worries about the weakness of the US dollar and renewed confidence in emerging market growth would buoy the price of crude in the coming months.
The spot price of a barrel of Brent Crude rose US$1.60 to $83.17, its fifth day of consecutive gains, and an increase of 6 per cent this week.
Lawrence Eagles, the global head of oil research at JPMorgan, said efforts by the US Federal Reserve to stimulate the American economy through quantitative easing would make oil cheaper in other currencies and stimulate demand.
He said oil could spike at about $90 a barrel in the short term.
"Quantitative easing is a real prime factor here and one of the reasons we're turning more positive towards oil prices … not purely from a demand perspective per se," Mr Eagles said.
Creation of new money to finance a second round of quantitative easing would be likely to result in a weaker dollar, and as oil is priced in dollars a fall in the value of the greenback would stimulate overseas demand and push up prices of crude.
Ben Bernanke, the chairman of the Federal Reserve, said last month it was "prepared to provide additional accommodation if needed to support the economic recovery", in remarks widely interpreted as hinting at more quantitative easing.
Since then William Dudley, the president of the New York Fed, has described the current recovery as "wholly unsatisfactory", leading market watchers to suspect more stimulus is on the way.
Although he saw some growth in developed markets, Mr Eagles said emerging markets would account for most of the growth in oil demand during the next few quarters.
"What we have is a combination of strong emerging market growth and a bounce back from recession," he said.
"You have a strong underlying demand base, and couple that with what's happening with the dollar and you have the potential for positive movement." But, he said some market conditions were similar to 2007-2008, when oil spiked at $145.65 a barrel.
"We're not projecting a stellar move higher at this point."
Mr Eagles said rampant growth in emerging markets was leaving power supplies "pushed to capacity", forcing some countries to resort to burning oil for power generation. Oil is the most expensive form of fuel and is traditionally considered a last resort.
Other analysts disagreed with his outlook. Neil Mellor, the currency strategist at Bank of New York Mellon, who wrote that currency investors should "brace themselves" for volatility this week, agreed that continued dollar weakness was almost a certainty. "You have to be a dollar bear at this point," Mr Mellor said.
"I don't think there's space for any other view at the moment." However, he argued that volatility in the dollar was unlikely to put upward pressure on the price of crude.
"It would take more than dollar weakness to get back to the levels of 2007-2008," he said. Mr Mellor said a repeat of the spike in oil prices was unlikely because of slacking growth worldwide.
"You've got to be pretty optimistic about the global economic recovery. That's borne out by the price action - oil's gone nowhere [recently]," he said. The UAE is home to 7.3 per cent of the world's total remaining oil reserves, according to Bloomberg.
ghunter@thenational.ae
