Crude oil price edges higher to 69.6 in European morning although the International Energy Agency revised down its 5-year oil demand forecast, citing the view that consumption will be recover to the level in 2008 until 2012.

Based on IMF's bullish GDP scenario which forecasts world GDP to expand +5% a year between 2010-2014, IEA estimated that oil demand will remain depressed and will only rise to 86.76 bpd in 2012, the first year demand will rise above 85.76M bpd, the level in 2008. If global economic growth is assumed to be +3% on annual basis, the recovery will be further delayed and may not be able return to 2008's level by 2014!

Gold price rises to 942 after retreating to 933.6 earlier today. However, we believe the precious metal remains in consolidative mode and USD may have chance to gain further after the Chinese Government said that it will not adopt abrupt change in its reserve policy. That is, USD will continue to be the dominant reserve currency. Key events determining the dollar's movement this short week will be ECB's rate and QE stance and US' employment report for June, both will be out Thursday.

Oil price in fact affect oil demand and hence economic growth. The impact of higher oil price on global economic is wide-ranged. First, surge in oil price means a transfer of wealth from oil consumers to oil producers. Countries in advanced economies are mainly oil consumers so they lose income to oil producers who are mainly emerging countries. Propensity to spend is generally larger in advanced economies than emerging one, as well as in oil consumers than in oil producers. Therefore, after such transfer of wealth, the degree of consumption contraction in oil consumers outpaces that the consumption expansions in oil producers, thus reducing the aggregate demand.

IMF said in 2000 that 'a $5/bbl increase in oil price will reduce the level of global output by around 0.25% over the first 4 years, after which the output losses slowly fade away'. However, this forecast was based on the assumptions that that the monetary authorities in advanced countries target expected core inflation, while fiscal policy is passive, allowing automatic stabilizers to operate.

Rise in oil price has significant impact on general price level. According to IMF, the magnitude of the impact will depend on the degree of monetary tightening and the extent to while consumers seek to offset the decline in their real incomes through higher wage increases and producers seek to restore profit margins. In the past, increase in oil price did not have much impact on core inflation as the gauge excludes food and energy prices. However, in recent years, the pass-through of oil price to core inflation has strengthened. One of the possible reasons may be change in pricing behavior as driven by rocket of oil price.

In a research report done in 2004, International Energy Agency stated that the surge in prices 1999-2000 contributed to the slowdown in global economic activity, international trade and investment in 2000- 2001. Global GDP growth may have been at least +0.5% higher in the last two or three years if the effect of high oil price did not exist.

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