Oil price drops on recession fears

14 August 2008

Concerns over a global recession is having an even bigger impact on crude oil prices than recent events in oil-rich Georgia, say experts.

While political unrest in oil-rich regions tend to push crude oil prices up, the conflict between Russia and Georgia only momentarily increased prices before they dropped again on fears the economic downturn is about to worsen. This saw oil prices hitting a four-month low of £113 on 13 August.

Paul Horsnell, an analyst at Barclays Capital, believes prices continued to drop because the market downturn had become more of a worry. “While it’s very hard to separate oil from economics there has recently been a lot of
downward momentum in price on fears of a recession.”

Agreeing with Horsnell, Andy Lynch, European fund manager at Schroders, believes the price of oil had been pushed up so high that when it finally started to fall in July it was not going to be affected by any external
incidents. “I would have expected the oil price to have gone up but it didn’t. This is because the oil price got into a very strong downward momentum,” he said.

Lynch warned however that political problems are still likely to pose a threat to oil prices. “I think we will continue to see political issues coming back to investors’ minds. Resource scarcity is a real threat and it hasn’t gone away.”

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