US rate cuts will push oil up to $120

published 14 March 2008

I'm still a buyer of oil at today's price of $108 plus. In fact, I'm sticking my neck out and telling you I think that WTI contracts are going to hit $120 and it's going to happen soon.

It's all down to the dollar.

The era of cheap oil is well and truly over; it is never going to return. Even Alistair Darling knows this. That's why he postponed the scheduled fuel-duty rise in today's budget statement as fuel inflation bites.

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Be in no doubt, the current oil price surge is being driven by one factor alone the stumbling US dollar.

Investors are not stupid. we all know where the dollar is heading. As the dollar falls and inflation for basic goods rises, investors are looking to protect their assets. This is driving the demand for commodities. This is why the oil price has hit new highs on a daily basis for the last week this is why it will continue to hit new all-time highs in the next few weeks.

The dollar will fall further. Interest-rate futures show that the market sees a 62% chance the Federal Reserve will cut its benchmark rate by 75 basis points to 2.25% on 18 March. This is a staggeringly inflationary move, but not unsurprising. The only thing Bernanke appears to have learned from his predecessor is how to print money.

That's bad for the long-term outlook for the US economy, but good for commodity investors like you and I over the next few months. The dollar fall will cause our commodity investments to rise as investors switch to the sector to protect their wealth from the fallout. It is as inevitable as night following day.

I never thought I'd feel sorry for the American middle classes but I do now. Not only are costs of living rising at a time where their homes, pensions stocks are decreasing in value, but the Federal Reserve is now using their hard-earned cash to bail out bad decisions from the banking industry to the tune of $200bn. That's $664 for every man woman and child in the country.

It's the dollar, stupid

Of course, it is not just the staggering and stumbling dollar that is driving the price, but it is the most significant and relevant today. The other factors that drive the oil price supply, demand and geopolitical tensions are almost irrelevant.

This morning, the International Energy Agency (IEA) cut its forecast for 2008 oil demand by 80,000 barrels a day to 87.54 million barrels, but oil futures have actually rose. The Agency is still forecasting a total 2% increase in oil demand this year, which is probably too high bearing in mind the recession in the US, but the Asian tigers are still hitting the pumps.

China and the Middle East expected to add about 400,000 barrels a day each this year. The IEA forecasts consumption will rise 6.1% this year in the Middle East and 5.6% in China.

The US recession is likely to stifle oil demand in 2008, but I remain a demand bull looking further out. In fact, as today shows, no-one is paying attention to demand figures the dollar is much more important.

I don't expect Opec will hike production any time soon either. The IEA said that Opec would need to pump an average of about 31.8 million barrels a day this year in order to balance global demand. Currently Opec is pumping less than 30 million barrels a day and there is no sign of a production rise.

This is a wise move by Opec. If the cartel increased production I believe it would have little effect on the oil price at the moment. Opec has always wielded its power with relish. It does not want the world to see that at the moment it has no power to control the oil price. That would be a humiliation.

I think most oil-price forecasts by analysts are dead wrong. According to Reuters, the current consensus for the average oil price in 2008 is in the mid-$80 area. This consensus is far too low. It will rise.

The Fed will cut interest rates further. Speculators will try to preserve their wealth by moving from the dollar to commodities. The rises in the oil price is not over yet; not by a long, long way. That's why oil producers are a must for your portfolio; they have the earnings leverage that you need.

This article is taken from Garry White's free daily email, Garry Writes'.