Oil May Pass $100 on ‘Loose’ Policy, Merrill Says

Oct. 5 (Bloomberg) -- Oil may jump above $100 next year as emerging market demand rises and “loose” monetary policy weakens the U.S. dollar, Bank of America Corp.’s Merrill Lynch unit said.

The global economy will grow 4.2 percent next year and spare global oil production capacity is 5 percent of current demand, Merrill analysts led by Francisco Blanch said in the bank’s Global Energy Weekly. There are “upside risks” to Merrill’s $82 a barrel forecast for the fourth quarter of 2010, according to the report.

“Without firm policy action to reduce global oil demand or an unexpected expansion in supplies, a continuation of extremely loose monetary policy in OECD economies next year could ultimately bring about another spike in oil prices well above $100 a barrel as we approach 2011,” the report said.

The U.S. Federal Reserve cut interest rates to near zero to pull the economy out of the worst recession since the 1930s. The easier monetary policy has helped oil rebound 56 percent this year to near $70 as investors turn to dollar-priced commodities as a hedge against inflation and a weaker U.S. currency.

“A vicious cycle of rising oil prices, rising capital inflows in emerging markets, continued emerging market currency appreciation and in turn higher emerging market commodity demand could trigger a sharp deterioration of terms of trade in OECD economies, putting the fragile global recovery at risk,” the analysts said in the report.

Oil for November delivery fell as much as 67 cents, or 1 percent, to $69.28 a barrel in electronic trading on the New York Mercantile Exchange today.