Oil prices have rallied by 10% over the past two months buoyed by improving sentiment on economic recovery and a decline in the US dollar. Based on historical trends prices could well increase further during 2013. However oil prices are now near the point at which energy costs have been a drag on economic activity in recent years, suggesting further increases in oil prices may be limited. Without a geopolitical shock oil prices are unlikely to move significantly above current levels.
Brent crude prices have been steadily moving up over the past couple months from around $106 per barrel in early December to just under $117 per barrel currently. Seen in a longer context however this only brings prices back to mid-September levels and prices are still some $10 per barrel below the recent highs seen in March 2012. Previous rally’s in Brent crude prices above this level have largely been driven by concern over geopolitical risks, notably in spring 2011 with the Arab Spring uprising and then in spring 2012 due to concerns over Iran’s nuclear ambitions. Where next for oil prices?