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(Alex Brandon/Alex Brandon/Associated Press)
(Alex Brandon/Alex Brandon/Associated Press)

Economy Lab

Oil price: Are we seeing the top of the market? Add to ...

From the FT's Lex blog

How many oil industry authorities does it take to call the top of the market? Three, so far. Saudi Arabia’s oil minister, Ali Naimi, thinks oil at $120 is “unjustified” because fears about supplies are overdone. Opec says supply constraints are easing. And, weighing in on Thursday, the International Energy Agency argues that oil market fundamentals are turning as supply moves ahead of demand - though the shift has yet to translate into the price. Of course, one false move from Iran and this emerging consensus is moot. But what if the pundits are right?

The oil price hit a peak of $128 a barrel this year, and is up about 13 per cent so far in 2012. That is mainly attributed to worries about Iran’s conduct in the Strait of Hormuz, through which a fifth of global oil supplies travel. Others blame quantitative easing - either via economic stimulus or by fuelling demand for speculative assets. The latter is hard to prove, although the oil price has come off recently as talk of further QE has receded.

Trouble is, a further retreat may not be the boon many hope for. A high and rising oil price affects economic growth, but not by much. Goldman Sachs estimates that a 10 per cent rise in the price of crude slows gross U.S. domestic product growth by between a quarter and half a percentage point. But with the American economy set to grow by between 2 and 2.5 per cent this year, that is within the margin of error. And a falling oil price is unlikely to do much for economies such as the euro zone, which have even more powerful reasons for lack of growth besides the cost of oil.

That said, falling oil prices should technically help stocks and bonds. As well as lower input costs, subdued energy prices help to keep interest rates lower for longer, boosting equity valuations. And if bonds rally, too, then it will be time to take the pundits seriously.

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