Oil prices rally faster than world economy

A rally in oil prices continues – but is this bull market in black gold getting a bit ahead of itself?

Oil has surged in recent weeks, rising again Thursday morning with futures contracts trading above $71 per barrel.

The rally is built largely on an improving outlook for the overall world economy – and hence for oil demand. But oil prices have been moving up a lot faster than forecasts for economic growth.

The latest catalyst for commodity investors comes in a forecast released Thursday by the International Energy Agency in Paris. It revised its forecast for oil demand upward by 120,000 barrels per day, globally.

Even with the uptick, though, the IEA is still forecasting that world demand for oil will shrink by about 2.9 percent this year (versus a 3 percent drop it forecast in May).

The new forecast would put global demand at about 83.3 million barrels per day.

There’s no “right price” for any commodity, beyond what the market sets. So it’s hard to know if oil prices have a lot further to run upward, or whether a downward correction will come at some point.

The economic outlook has clearly brightened. The consensus view is that the US will begin moving out of recession later this year. But the economy hasn’t turned a corner decisively yet. That IEA forecast still calls for oil demand to fall pretty sharply this year, after all.

To see how investors have climbed onto the oil bandwagon, compare the performance of two exchange-traded funds in recent weeks: DBO (which represents oil as a commodity) and VT (a Vanguard fund that represents the global stock market). Both are up more than 33 percent in three months. But about eight weeks ago it was the stock fund leading the way. In June, the stock fund – perhaps the better indicator of investors' overall outlook on the economy – has been pretty flat. The oil has kept marching upward – nearing a 50 percent gain in just three months.

If oil keeps climbing higher, it may start becoming a force that works against an economic recovery. Consumers are already shelling out more at the gas pump, which is making it harder for them to spend more in other sectors of the economy.

– Guest blogger Mark Trumbull is a Monitor staff writer.