Crude oil surges to $70 and retreats

06 June 2009

Crude oil prices breached a 7-month high of over $70 a barrel yesterday, encouraged by positive US government employment data.

During the session, prices rose to a high of $70.32 a barrel for July deliveries in the New York Mercantile Exchange (NYMEX), before cooling off to $68.44, a 0.54 per cent drop from the previous close of $68.81, recording the third consecutive weekly gain.

The job losses, an indicator of health of the US economy, recorded a drop of 345,000 in May, much below the April figure of 504,000 and the lowest fall since October 2008, the Labour Department data revealed. However, the rate of unemployment is still high at 9.4 per cent, the highest in 25 years.

Leading analysts are raising their oil price forecasts for the current year and for 2010. Goldman Sachs has increased its estimate for 2009 to $59 a barrel from $50. Further, the target for 2010 has been revised to $80 a barrel from $70. Analysts have estimated a price of $80-85 towards the end of 2009.

Analysts believe that the recent surge in oil prices has been triggered by signs of improvement in global economy; encouraging Chinese manufacturing data for May, the bankruptcy of General Motors which is expected to make the auto giant healthier, and improvement in investor sentiment that the global economic recession is on the wane, apart from the production cuts by the OPEC members since last September, which is around 5 per cent of the global supply.

Higher prices needed to stimulate spending
In the Reuters Global Energy Summit held this week in London, industry officials expressed the view that the oil prices need to be higher in order to stimulate exploration and development of new oil fields for the future, which has been stalled due to lack of funds following the severest economic recession in six decades.