Interest rate hike not likely to push crude oil prices out of the $75-$83 band.
Turning our attention abroad, much ink has been spilled on OPEC’s meeting today (Wednesday), but we’re expecting very few surprises. There is no incentive for any of the members to hike/cut production, apart from Iran being Iran.
Another big concern is China’s upcoming interest rate shift. With a stronger than expected increase in the consumer price index (2.7% instead of 2.5%) for February, analysts are beginning to worry about inflation and over-heating.
But if the government steps in to increase interest rates it could signal a tightening in the credit markets and a sell-off in the equities markets and, in turn, commodities prices.
But just like OPEC, we believe the effects of an interest rate hike will be muted. Consider that China’s imports of coal increased 437% between January 2009 and January 2010, while crude oil imports increased 33.33%. While February 2010 saw a slight decline in crude imports, we expect demand levels to hold steady or continue trending higher.
The infrastructure required to import and process such large amounts of raw materials cannot be switched off overnight. Further, car sales in February were 115.5% higher year-on-year, and all those new drivers will not hang up their keys without a fight.
Thus, here at The Schork Report,we don’t project that China will push prices to $200 since another 400%+ increase in imports is unlikely, but neither will a slight shift in the interest rates cut off oxygen to one of the world’s fastest growing economies.
Traders should keep this in mind before assuming that interest rate news will push crude oil prices out of the $75-83 band, in either direction.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.