Rising crude oil prices have been been a head-scratcher this summer. West Texas Intermediate oil has risen 22 per cent since the end of June, hitting its highest level since May. And Brent crude has risen nearly 30 per cent since June.
One popular explanation is the threat of an attack on Iran’s nuclear capabilities. But as James Hamilton pointed out on his blog, Econbrowser, the market doesn’t appear to be taking this threat too seriously: The Intrade contract for an imminent attack on Iran has moved relatively little over the past five months and is well below a high hit in February.
The other explanation relates to stagnant global production, with levels just about unchanged since January.
But Mr. Hamilton – a professor of economics at the University of California, San Diego – believes that optimism about the global economy is playing the biggest role in oil’s rebound. Or, more specifically, shifting impressions about how the global economy will perform over the next six months.
The S&P 500 and crude oil prices have traced a similar route in recent months, with both declining between April and June, and then rebounding together as well – a curious path given the onslaught of dismal economic news.
“A stronger economy should mean both higher corporate profits and higher demand for oil,” Mr. Hamilton said. “Markets are apparently betting that favourable economic trends in places like the U.S. and China are enough to outweigh the discouraging numbers coming out of Europe. Whether markets have that right remains to be seen.”
Paul Ting, of Paul Ting Energy Vision, believes markets do have it right, but there are plenty more gains coming. In a report, he argued that we are on the verge of what he called a long-term “seismic shift” in oil prices – but one that has less to do with the near-term health of the global economy and more to do with stockpiling of reserves by China.
“We believe that China’s crude oil stockpiling can last through 2020/2025, with rates matching the peak historical [strategic petroleum reserve] accumulation rates conducted by the U.S.,” he said in his report, referring to stockpiling in the 1970s and again after 2001. “This prolonged crude oil stockpiling requirement will have a tremendous effect on the global oil market, as history told us.”
He favours investing in so-called upstream companies, which are companies that explore for oil and produce it. He also prefers companies that have a close association with Brent oil rather than WTI, given his belief that Brent is a more global benchmark and has a better connection with Asian economies.
“We are convinced that investors should be constructive on the upstream sector, using any pullbacks in oil price as an opportunity to increase their upstream positions,” Mr. Ting said.