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Why crude oil prices keep rising
Updated: 2009-06-01 09:16

World Crude oil prices have been climbing steadily in the past month with benchmark crude for July delivery rising above $66 a barrel on the New York Mercantile Exchange on Friday.

Nymex benchmark crude soared some 30 percent in May, the biggest monthly rise in a decade.

Analysts believe the recent oil market rally was largely a result of increasing investor confidence in the global economy, rising crude inventories in some major advanced economies and market speculation.

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Major advanced economies, such as the United States, the Euro zone and Japan, are currently in severe recession, which means dampened demand for crude oil, although latest economic indicators show that the slowdown of these economies is becoming less steep.

"The combined GDP of the 30 members of the Organization for Economic Cooperation and Development (OECD) accounts for some 71 percent of the world's total and when there are signs that those economies are bottoming out, it sends a clear message to the oil market that demand might pick up sometime later," said Li Changjiu, a Chinese expert on international economic issues.

The Paris-based OECD consists of the world's major industrialized economies, including the United States, Japan and some European economic powers.

The United States and other major advanced economies have been increasing their crude inventories after crude oil prices nosedived in the second half of 2008 as the US sub-prime mortgage crisis escalated into a full blown global financial crisis.

Inventory increases in industrialized countries have also contributed to the recent rise in crude oil prices, according to Li.

The Paris-based International Energy Agency (IEA), which advises on energy issues for OECD member countries, recently estimated that commercial crude inventories in OECD countries had risen to 2.74 billion barrels by the end of March, 6.7 percent up from a year earlier.

Commercial inventories in OECD countries amounted to 62.4 days of consumption at the end of the first quarter this year, eight days more than in the same period last year, according the IEA.

"The United States has been increasing its crude oil inventories since the price hits a low of around 30 dollars a barrel in March," Li said.

Furthermore, speculative traders are flocking back to crude oil markets in hopes that demand for crude oil would eventually rise with the bottoming out of the global economy, Li added.

As the problem of speculation in international crude oil markets has become increasingly acute over the past few years, many non-commercial traders, who do not use crude oil directly, flocked to crude oil markets to seek better investment returns.

Taking advantage of the continued rise in crude oil prices from 2002 to the first half of 2008, the speculators traded crude oil futures contracts like stocks or bonds, amplifying supply and demand effects on the price movements.

Li predicted that prices of crude oil, as a nonrenewable resource, would head upward in the long run.

He added that crude oil prices would fluctuate in the short term, depending on the developments of the global economy.

The recent rally on international crude oil markets means different things for oil producing and consuming countries, according to Li.

For those oil exporting countries in the Middle East, Central Asia and Latin America, a rise in prices would partially offset the adverse impacts of the current global financial crisis on their economies.

For example, a rise in crude oil prices will help the Russian government cope with the fiscal burden and the country's economic woes. The Russian economy depends heavily on oil revenues.

But for oil consuming countries, a steady rise in the prices would have a negative impact on their economies as higher energy costs usually lead to a higher level of inflation.

Even for oil consuming countries, higher crude oil prices mean different things to the advanced economies and emerging economies, Li added.

"Compared with the United States and Japan, China and India need more energy to achieve the same amount of output," he said, adding that the rise in crude oil prices would have a bigger adverse impact China and India, the two developing economies.

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