Crude oil achieved another record price yesterday, however the cost of oil could rise higher today.
The cost of crude oil rose to the record high of $145.75 per barrel yesterday as the oil stockpile in the US had fallen over the last month. Traders responded to these lower than expected inventory levels by driving the price of crude upwards.
Three main factors are forcing oil prices upwards – political tension in the Middle East and Nigeria, surging demand from rapidly developing countries such as India and China, and a weak dollar.
It is further weakness in the dollar that could trigger a another rise in oil prices today.
As crude oil is priced in dollars, it becomes more attractive when that currency weakens.
The dollar is already weak against the Euro, currently trading at an exchange rate of 1.5874, however if interest rates in Europe rise, then the Euro will strengthen further against the dollar.
Euro interest rates may rise
A strengthening Euro, and a further weakening dollar may occur later today as the European Central Bank (ECB) is very likely to raise European interest rates.
Like many economies at the moment, countries in Europe are experiencing growing inflation, ironically because of the rising cost of oil which triggers rising costs of food and other goods.
The ECB is very likely to raise interest rates from 4.0% to 4.25% percent later today in an effort to contain further inflation. This will cause the Euro to rise against the dollar, making oil even more attractive to investors.
Oil prices may rise
As many investors see oil and the dollar as being inversely attractive – investing in oil futures when the dollar is weak, and vice versa – we can expect to see further upwards pressure on the price of crude oil if the ECB does increase interest rates today.
With oil prices predicted to reach $170 per barrel in the Autumn, a rise in crude prices today, make that prediction more likely, particularly as further weakness in the dollar is to be expected in the next few months.
High oil prices are now a part of our lives. Some expect a crash back to price levels of $100 per barrel, however a weak dollar and continuing political tensions within some oil producing countries, make this unlikely.
If the ECB does increase interest rates today, then we will all feel the effects as our costs of living will rise yet more, and they are high enough already, it seems.