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Worst of the U.S. Recession Over

Economics / US Economy Jun 11, 2009 - 04:28 AM GMT

By: Pravda

Economics

Oil prices soared above $71 a barrel Wednesday to reach a 2009 high, as investors poured money into crude markets to protect themselves against the inflation risks posed by a weakening U.S. dollar.


Oil, which typically trades inversely to the dollar, has more than doubled in price in three months as traders also cheered news showing the worst of a severe U.S. recession is likely over. They brushed off data — such as a 9.4 percent U.S. unemployment rate in May — that suggest crude demand will remain weak. Even growing inventories have not checked crude's stellar rise.

Benchmark crude for July delivery was up $1.35 at $71.36 a barrel by noon in European electronic trading on the New York Mercantile Exchange. On Tuesday, it jumped $1.92 to close at $70.01.

"I wouldn't be surprised if we're testing $80 in a week or two," said Gerard Rigby, energy analyst with Fuel First Consulting in Sydney. "The momentum right now is too strong."

A weaker U.S. dollar and expectations massive fiscal stimulus spending could spark inflation have bolstered the market, the AP reports.

Since May 18th, oil prices have gained about 25 percent. Energy stocks .GSPE gained 4.5 percent during that time, while the S&P 500 .SPX rose 3.1 percent, led by resource and technology shares.

The hope, according to investors, is that the rise in oil prices boosts the earnings potential in the sector, which has been one of the poorer-performing sectors in terms of earnings in recent quarters.

But this will take time. Earnings expectations for the sector seem based on a U.S. crude oil price of about $49 a barrel, said strategists at Bank of America-Merrill Lynch, in a research note, Reuters reports.

"Changes to estimates for the energy sector tend to lag oil price changes, as consensus generally catches up to price changes over the subsequent few months," Merrill Lynch strategists said in a research note.

"History suggests a 10 percent change in oil prices equates to a 4.0 percent change in energy expectations three months forward," they wrote.

Pravda.ru

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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