EMRE DELİVELİ >What’s driving the rise in oil prices?

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Theprice of BrentCrude, the benchmark based on North Sea oil, fell $ 35 between April andJune, but increases since then have taken about $ 25 of that back. According tomany, reports that Israelwill bomb Iran’s nuclear facilities are behind this surge. But do marketsbelieve that this event is now more likely to occur? 

Prediction markets allowanyone to bet on real-world events, anything from who willwin the U.S. Presidency to whether Basharal-Assad will still be President of Syria at the end of the year. Intrade,one of the largest of such markets, has a contract on whether Iran willbe hit before year’s end. The price of that bet has pretty much stayed constant,not only in the last couple of weeks, but also during oil’s sharp fall fromApril to June and its strong rebound afterwards. 

Supplyfears are probably the second most popular reason cited for the rise in oilprices. Markets could be worried that Iranianoil sanctions would cause a disruption in supply, but everyone had sixmonths to prepare before the sanctions came into play.

Regionalsupply shortages have been balanced by more production elsewhere. While thereare maintenance-relatedcuts in the North Sea, theU.S. has increased output. As a result, the wedge between Brent and WestTexas Intermediate, the other benchmark, has grown. Iraqhas stepped in to fill the shortfall crated by Iran, and SaudiArabia has been pumping record amounts. Overall, productionfell about 1 million barrels per day in June and did not recover in July,but this cannot account for the entire jump in the oil price. 

Aftergoing through similar arguments, James Hamilton, professor of economics atUniversity of California, San Diego and oil expert, concludesthat “the most important factor driving oil prices recently has beenchanging assessments of how strong the world economy will perform over the next6 months.” He notes that
the decline in oil pricesfrom April to June and the subsequent rebound have mirrored stock indices. 

Buteconomic data since June have been mixed at best. I’d argue that oil has beensupported of late by expectations of easing by the American, European and Chinesecentral banks. Those expectations got a boost this week, first with thepublication on Wednesday of the Fed's recent meeting minutes, which suggestedthat quantitativeeasing may come soon, followed by remarksfrom People’s Bank of China Governor that adjustments to interest rates andbanks' reserve requirements were still possible.

Thisdiscussion may help you understand whether or not the recent surge in priceswill be temporary, which could have important local implications. Every Turkeyeconomist knows that a $ 10 rise in the price of oil increases the country’scurrent account deficit by $ 4.5-5 billion. The Central Bank recently notedthat the same $ 10 causes a 0.4 percent rise in yearly inflation.

Muchis at stake here. In its latest assessment of the Turkish economy on Thursday,ratings agency Fitch noted that it could
upgradethe country to investment grade if the current account deficit andinflation improve. The likelihood of this happening will partly depend on thepath of oil prices.


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