Oil Renews Its Assault on $90


Crude oil reached a multi-month high of $85.73 Wednesday and many traders believe it will go up further. The Federal Reserve's announcement of its $600 billion bond purchase plan -- QE2 -- pushed the dollar lower. Crude prices are set in dollars, and a weak dollar makes oil a more attractive investment for buyers who use foreign currencies.

While the weak dollar alone could drive oil prices higher, there are other forces at work as well. Demand in China continues to rise as its economy surges. Its PMI index was unusually strong last month, which means that energy demand is likely to rise. China became the largest net importer of oil last year, surpassing the U.S.

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OPEC's plans are also crucial to the price of oil. Some of the members of the cartel have said a weak dollar would give OPEC an incentive to keep production at current levels because the weak dollar decreases receipts to their treasuries. OPEC may even be willing to cut production to keep the price of crude up.

There are a number of predictions that weather in the northern tier of the U.S. and Europe will be especially cold this year as the melting of the Arctic ice cap sends cold ocean water south. A cold winter would mean a spike in heating oil consumption.

Another factor in oil prices is the infrastructure of oil exploration and delivery. The Deepwater Horizon disaster is only one of several threats to crude supplies. Recent research indicates that the aged pipelines from Alaska have a number of troubling problems which have not been repaired.

Finally, there is the omnipresent issue of the government stability in large oil supplying nations like Iran and Nigeria. Political and social upheaval in those nations would cause interruptions in their ability to export crude -- at least temporarily.

The arguments for higher oil prices are more powerful than those against.