According to Bloomberg, as the US economy continues to show signs of improvement, the demand for oil will increase. Currently the commodity is trading at a 10-year high, after the US Energy Department came out with a report that indicated that the US is currently experiencing an unexpected drop in fuel supplies. Adding to the pressures associated with this supply shortage, the US dollar is still experiencing the adverse effects of a disadvantageous exchange rate with its European counterpart. According to the same article, the US dollar is at a 15-month low against the euro.
The current status of the world market for crude oil has been negatively impacted by the unrest in the Middle East. Most recently, the supply in the United States dropped by 2.32 million barrels to 357 million in the past week, according to Bloomberg, which represents the first drop since last February. In terms of the impact that Libya’s transition has had on the Crude oil market, one should note that their output, which previously averaged around 1.6 million barrels per day, fell to roughly 390,000 in March. From a purely objective standpoint on the effect that the turmoil in the Middle East is having on the oil market, it is obvious that the continued struggles will likely hamper productivity in this sector, and for the US economy, prices will most likely continue to rise.
However, it is important to note the Saudi Arabian influence on OPEC in recent months. According to Reuters, this country is attempting to fill the gap in the oil market, and has a vested interest in keeping prices down in order to ensure high gasoline prices will not have an adverse effect on demand. The problem that analysts mention with these countries’ attempts to fill the gap in the market is that while it is true that they can bolster production, the spare inventory of the Middle East producers is invariably ‘heavy, sour crude’ instead of the higher quality ‘light, sweet crude.’ According to the Reuters article, there still will be a deficit in this lighter, sweeter crude in coming months, while the heavy crude is likely to remain heavily discounted.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
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