Western markets were taking a nervous breather over the weekend, with only one subject on the minds of traders and bankers from New York to Shanghai – the oil price.
The surge in oil on Friday – when it recorded the biggest single day rise ever to spike at $139 a barrel – has upset the arithmetic of world financial markets, and it will be intriguing to see whether the oil bulls dominate trading when the big markets open this morning. Just when it seemed as though the bears, led by Lehman Brothers, were back in charge, once again the charge to $200 per barrel is back on, as predicted by rival forecasters at Goldman Sachs.
Friday's spike was caused by a curious serendipity of economic and financial factors that proved how volatile the energy markets can be. An unexpected rise in American unemployment rates – the highest in 22 years – sparked the oil surge, but not in the way you might expect. Normally such an event would be regarded as further evidence of a slowdown in the US, which would reduce world demand for oil and therefore lead to a price fall.
This time, however, the rise in US jobless was taken as an indicator that the Fed would not be able raise interest rates this year, which in turn caused a weakening of the dollar, and an increase in price of those commodities, like oil, which are denominated in the US currency. Such are intricate the equations and inter-dependences that determine the price of the precious black stuff. You might regard this combination of factors as so rare an occurrence as to be a one-off, and therefore expect oil to ease back when the Western markets open today.
The other view is Friday's oil price surge proved just how much pent-up upward pressure there is in global energy markets. They will interpret any event as a signal to mark up the price of crude. Of course, the Gulf is sitting pretty in this situation – or is it? It is the accepted wisdom that rising energy prices simply add to the huge stocks of capital available in Gulf economies, and with subsidised prices for oil products in domestic markets, have no material impact at home.
But this takes no account of the dollar peg of GCC countries, which we are told is here to stay for the forseeable future. If the oil surge is the result of dollar depreciation, rather than intrinsically increased demand for the product, then it simply adds to the GCC's inflation problem in a big way. It is a conundrum to challenge the skills of any economic policy-maker.