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4 Reasons to Short Oil: Economist

Oil prices have recovered from a short sharp sell-off late last month to hit fresh highs but could be about to sell off again, according to Julian Jessop, the chief international economist at Capital Economics.

Oil Refinery
Oil Refinery

"The main driver of the oil priceis the improving economic data. It is no coincidence that prices jumped in the wake of Friday's encouraging US employment report, and this explains why equity markets have taken higher energy costs in their stride," Jessop wrote in a research note.

"At the global level, a rise in oil prices due to buoyant demand is clearly less of a threat to economic growth than the same rise due to disruptions to supply," Jessop added.

"This is especially so when, as now, oil producers such as Saudi Arabia have a strong incentive to spend more of their windfall gains in order to ease political unrest at home," he said.

Four Reasons to Sell

Those fearing oil will regain record highs are likely to be disappointed according to Jessop, who sees four reasons to sell.

"There are plenty of individual economies where the run-up in oil prices is becoming a problem, particularly those facing a tight fiscal squeeze and where any further rise in headline inflation could tip the central bank into an early increase in interest rates," he said.

This group includes the UK, parts of the euro zone and even China said Jessop, who warns the inflationary boost in the short term and demand destruction in the medium term will be bad for prices.

OPEC could also come under pressure to drive prices lower if the global economy weakens, according to Jessop, who points out that $90 a barrel is the cartel's preferred price.

Following the wave of revolutions in the Middle-East and North Africa, the worst fears of contagion into Saudi Arabia have clearly not been met, he said.

This, added to the end of the second round of quantitative easing — a method by which central banks create money to boost economies — should drive brent crude oil prices back towards $85 a barrel by year-end, Jessop added.