What will drive oil prices going forward?

S&P 500: -3.28 (-0.35%)

Markets fell despite a strong start as climbing oil prices and increasing interest rates caused investors to worry that inflation will prevent a rapid economic recovery. In recent weeks, rising oil prices have been interpreted as a sign that the economy will return to growth, but the pace of gains is now causing some concern. What will drive oil prices going forward?

Bulls point to increasing demand in China, but bears question whether China’s demand offsets lower consumption in other developed nations.

OPEC’s production cuts is another common bull argument, but OPEC historically has difficulty maintaining discipline and some members desperately need to sell crude to make their budgets work.

The weakening U.S. dollar supports higher oil prices, but the Euro-zone’s troubles and the potential for tighter monetary policy in the U.S. gives the bears reason to believe the U.S. dollar could strengthen in the future, thus causing lower oil prices.

Another common bull case is that the U.S. economy is bottoming and will soon return to growth. While this may turn out to be true, higher oil prices may be the straw that breaks the back of U.S. consumers that are already dealing with high debt levels as well as lower home and investment values.


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Peter J. Lazaroff