05 August 2010 - The fundamental outlook for crude oil suggests prices may fall back in September as the global recovery tapers off and governments across world withdraw fiscal support. According to Daily FX, the leading online trading news and information service, crude oil will push lower, from its current $80/bbl to around $72/bbl by September before extending its decline.
This reverse is in contrast to recent rises that have been mainly stoked by US dollar weakness, a rebound in world trade and the rise in global activity which may drive the cost of energy higher as the recovery gathers pace. According to the IMF the world economy to expected to grow by 4.25%.
However, the European debt crisis and the withdrawal of support for the world economy by officials have slowed the outlook for future growth. As a result the Organisation of Petroleum Exporting Countries (OPEC), which accounts for about 40% of global output, has committed to cutting production by nearly 70,000 barrels a day to meet future demands as supplies outside of the 12 members increase at a faster pace than anticipated.
The emerging economies are leading the global recovery with rapid expansion in the developing countries counterbalancing the tepid growth in the major industrialised nations. For example, economic activity in China grew by 11.9% in the first three-months of the year, marking the fastest pace of growth in nearly three-years, which was followed by a 10.3% expansion in the second quarter.
Uncertainties surrounding the global outlook could weigh on commodity prices as the US dollar benefits from safe-haven flows. The US dollar and North American economic performance will also impact future oil prices. However, as the recovery in region gathers pace, the Federal Reserve may revise its economic assessment and normalize monetary further over the coming months. This would lead to a decoupling of the strong correlation between the US dollar and risk sentiment as investors speculate the central bank to lift the benchmark interest rate from zero over the medium-term.
David Song, currency analyst at Daily FX said: The oil market continues to be affected by the persistent overhang in supply. Despite global economic growth, the recovery remains slow and prolonged, especially in Europe which is growing at a much slower rate then the emerging markets. While the US dollar remains the global trade currency, its performance will also affect the price of oil, which we believe will continue to push lower over the coming months.
These fundamental developments coupled with interest rate expectations may play a greater role in driving price action going forward, and the dollar may show a greater reaction to the changes in the economic landscape as investors weigh the outlook for future growth.
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