By Angelos Damaskos, CEO Sector Investment Managers and Fund Advisor, Junior Oils Trust
Geopolitical events in North Africa and the Middle East have supported the oil price in recent weeks. The announcement by the Federal Reserve (Fed) of QE3, with the unlimited purchase of agency mortgage-backed securities to the order of $40bn per month, and the extension of low short-term interest rates to 2015, shows their determination to fight unemployment. By pushing longer-term interest rates down, the hope is that fixed-asset investment will be stimulated, resulting in subsequent employment. The risk the Fed is willing to take is that inflation may rise significantly and the dollar could devalue further against a basket of currencies.
Dollar devaluation has historically resulted in higher commodity prices. Stronger economic growth leads to greater demand for commodities, notably oil. China is launching measures to stimulate its growth and, mainly targeting infrastructure, which should result in greater energy consumption. Stronger demand is facing a tense supply situation as the geopolitical issues appear deeply rooted. The rising oil price trend, therefore, looks set to continue.