Viewpoint on Oil with Dan Rice
Oil prices are, almost by definition, volatile. But amid political disruptions in the Middle East and North Africa, 2011 has seen more than the usual dose of price turmoil. Dan Rice, Managing Director and portfolio manager with BlackRock's Global Resources team, explains why, in his view, these sorts of short-term disruptions are unlikely to have a lasting impact on oil prices.
Why the high volatility in oil recently?
Crude oil futures first spiked in late January when rumors began that the key Suez Canal oil transportation pathway might be jeopardized with the fall of the Egyptian government. Futures then soared to two-year highs amid the turmoil in Libya, trading over $100/barrel. Generally speaking, prices have moved erratically since.
Do you expect prices to remain elevated?
A long-term shift to higher oil prices is a possibility, but that's not our expectation. In early 2011, the equity market was pricing in $80 to $85/barrel oil. We think markets will eventually settle around $95/barrel, a number we believe is consistent with longer-term supply/demand dynamics. Ultimately, the forces of supply and demand control the long-term price of oil, and absent a significant disruption in supply, the market should return to its earlier trajectory. In fact, the past 30 years have provided multiple examples of even more heated conflicts that have caused dislocations in the oil market, only for the market to return to its previous pricing trend.
How might the economy be affected?
More volatile commodity prices (particularly to the upside) often trigger fears of a contraction in world economic growth, since energy expenditures represent a significant portion of personal consumption in many countries. But even when oil markets are disrupted by events similar to those seen in the Middle East, such disruption tends to be temporary and is unlikely to cause the world GDP growth rate to change.
And the impact on investments?
We believe the long-term supply/demand fundamentals should remain positive for the energy and resources sector. Urbanization and industrialization trends in emerging market economies continue to drive long-term growth in the energy and resources space, making these sectors attractive opportunities for investors.
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