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July 15, 2011 at 09:42 AM
A report released by Alliance Bernstein on Friday says oil prices should continue to rise and the “black gold” should remain expensive when compared to some precious metals and other benchmarks in the medium term, though its price can be considered relatively “low” in the short term.
In a report titled “Is the Price of Oil Cheap or Dear? An Apples-to-Apples and Barrels-to-Burgers Comparison,” Bob Brackett, Michael Parker, Hugh Wynne and several other analysts look at the price of oil in relationship to the value of the U.S. dollar, gold and other measures. They conclude that oil has been relatively expensive since 2005 and should continue to be so until at least 2013. Still, it remains below peak levels of 2007-2008.
“Today’s crude prices are about $10-$15 per barrel above our calculation of marginal cost, driven by current levels of spare capacity and inventory,” they wrote in the report. “We therefore currently carry a crude oil deck with values for West Texas Intermediate growing from $100/bbl in 2011 to $110/bbl in 2013.”
The analysts say it’s important to put oil prices in a comparative context in order to grasp the broad trends affecting its price, volatility and the movement of other commodities as well as currencies.
“As the week unfolded and hopes for QE3 rose and were then subsequently snuffed (at least for the time being), observers watched oil prices rise $5/bbl to above $99 a barrel only to settle down below $96 a barrel, once again confirming the (inverse) correlation between oil and dollars and leading some to wonder the appropriate yardstick for understanding absolute oil price levels,” Brackett and his fellow authors explained.
The analysts conclude that for those who hold British pounds, current levels of Brent are higher than when oil prices peaked in the summer of 2008. However, for those holding stronger currencies (such as the Swiss Franc), oil prices are closer to 2007 levels.
To look at the changing price of oil vs. the movement of global currencies, the Alliance Bernstein commodities team examined oil prices relative to gold prices and calculated how many barrels of oil a person could purchase with an ounce of gold over time. The analysts found that – in times of extreme excess – the value approaches 30 barrels per ounce, while in times of extreme scarcity, it approaches 10 barrels per ounce.
