Oil markets enter high price era
By Syed Rashid Husain
RIYADH, June 18: Despite the decision of the Opec oil ministers, who met in Vienna on Thursday, to increase their output ceiling and their readiness to do whatever they can to check the rising oil prices, the markets in sharp contrast were already signifying concern and confusion.
Markets perceived the decision as mere technical correction, as the producers were already producing above their output quota. The decision was basically to legitimize the already enhanced output levels, analysts here in Dhahran, the virtual global energy capital commented. Markets refused to take the decision in positive frame and crude prices continued to approach the $60 a barrel mark. Analysts are of the view that the $60 psychological barrier may not be too far off now.
Currently the markets are balanced, no one indeed denies – yet the balance is precarious – virtually on the knife edge. The slightest hint of a disruption or the remotest of the movements that could impact the thin edge demand-supply balance, make the markets itchy and nervous. It then reacts accordingly. For almost the entire last week, the markets have been reacting rather erratically to similar far-flung developments.
This is indeed not an ideal situation. The producers are under constant global scrutiny for no fault of theirs.
Reports emanating from Baghdad also contributed to this. Iraq reportedly is planning to cut down its already lower than potential oil exports by an additional 15 per cent during the second half of the year -– apparently owing to the ongoing insurgency in the country which often targets the oil infrastructure. Further despite the euphoria that once the war gets over, there would a flood of investments in Iraq which could take the country’s production to record new levels. However, that has not taken place. The resultant lack of investment in the oil related infrastructure in the country has in practical terms, diminished the possibility of any substantial increase in crude exports from the country in the immediate future. In fact for the remaining part of the year it has now been reported that it is going to be even less than previous months and years. Markets definitely became uneasy at this development.
The situation now is such that even the slightest hint of any disruption in oil flow generates its own ripples. Even the hint of a storm witnesses the market reacting desperately. As soon as the word started to spread that the first tropical storm of the season could impact the oil production in offshore Gulf of Mexico, crude prices started to firm up in the markets.
Although in the meantime, the crude markets also reacted to the IEA report on Chinese consumption rather positively and for a brief period, prices did go down over the last few weeks.
The IEA now sees 2005 China growth as 460,000 barrels a day to 6.89 million bpd, up by 7.1 per cent from 2004, yet down 10,000 bpd from the last month’s forecast. This report led the crude a few dollar cents lower in the market place. However, it also predicts that the global oil consumption would also increase by 2.2 per cent in 2005, to 84.3 million bpd – not an easy situation indeed for the markets to live with.
It has rarely been so precariously balanced in recent times, analysts here agree and admit. This is indeed a point of concern for all, even the producers.
Crude markets thus appear to have entered a new era. The higher than normal oil prices appear to be in for a rally, longer than most expected initially. Analysts agree that oil prices for the rest of the year are going to hover somewhere between $50-$60 a barrel. Some are even predicting that with the onset of the winter season, as the need for heating oil would go up later in the year, the $60 a barrel era is just round the corner. |
