Higher Oil Prices: Asian Perspective and Implications for 2004-2005

Abstract

Higher oil prices are descending upon the nascent global economic recovery. Strong demand growth driven by the global recovery, combined with continuing instability in the Middle East, appears to underpin the oil price rally. The latest data on oil production and consumption from the International Energy Agency (IEA) suggest that tight supply conditions continue on higher than expected growth in global demand, partly reflecting fast-growing energy demand from Asia.

Given the relatively low inventory level and the limited refinery capacity, effects of supply interruption can be quite detrimental, which spurs speculative activities. The risk premium on fear of terror in addition to the tight market outlook appears to send the price of oil futures even higher in the short run. The development in the futures market - partly responsible for the hike of oil prices - implies that the recent rally in oil prices could stay.