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Page added on August 26, 2012

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Oil prices are setting their own course

Consumption

It is indeed difficult to write about the evolution of oil prices in the market of few months now. Prices seem to move against expectations, one way or another.

Since the peak of $124.12 (Dh455.9) a barrel on March 18 for the Opec (Organisation of the Petroleum Exporting Countries) basket of crude oils, prices have fallen fast to $88.74 a barrel on June 26, only to start rising again, contrary to expectations and in the light of a decision by an Opec Conference on June 14 to leave the production ceiling where it was at 30 million barrels a day (mbd). The Conference “decided that member countries should adhere to the production ceiling of 30.0 mb/d” to please those members who wanted stronger action.

Prices were expected to move downward further but the rise has been remarkable and almost continuous since then. The price on Thursday was $113.56 a barrel for the basket crude and the average for August so far is almost $109 a barrel as compared to almost $94 a barrel in June.

An Opec monthly report says that most of the fundamental reasons behind the decline still remain, such as uncertainties in the world economic outlook and the rise in global oil inventories. The International Energy Agency (IEA) is saying that “sluggish economic growth could restrict annual oil demand growth to 0.9 mb/d in 2012 and 0.8 mb/d in 2013”, numbers that agree with the Opec estimate. The Opec is more optimistic in the sense that it says the oil market is no more in a declining momentum.

Even the geopolitical situation is less volatile and while the confrontation with Iran is still on, it is not expected to flare. Even the embargo on Iran oil is slow to show in numbers, but may become more visible later.

Rise in inventories likely

Opec production in July fell to 31.39 mbd or 70,000 barrels a day less than in June. Such production is adequate for requirements in the rest of 2012 but higher than the average annual call of 29.9 mbd. The call for 2013 is even less at 29.5 mbd and, therefore, inventories are expected to rise.

Against this background, Barack Obama’s wishes to release some of the US strategic stocks to cool the oil market have not been met with approval by the IEA or even by some individual members of the organisation such as Japan and Korea while France and the UK are prepared to discuss. However, the IEA chief Maria van der Hoeven said that the US have more than the mandatory 90 days’ stocks and, therefore, they can release the extra on their own.

On another front, the market was affected by the on-and-off new round of quantitative easing in the US or a solution to the Eurozone debt crisis, particularly if Greece will be given more time to meet the requirement for additional funds from its European Union partners.

But further support may be coming from tropical storm Issac which has the potential to reach hurricane force in the Gulf of Mexico. Oil companies are already reducing or stopping production there while evacuating or reducing the numbers of their operating staff on the platforms.

Only the US produced 1.27 mbd of oil from the Gulf of Mexico or 23 per cent of its oil production and 7 per cent of natural gas output.

Concerns of oil producers

The fear factor is still strong in driving the oil market and while the lingering problem with Iran is taking a breather, fear of the long term is still there. Will there be enough oil to drive development? Will Opec countries carry their investment programmes as planned? Is peak oil real or a myth? Will the development of unconventional oil go unhindered in spite of widespread opposition by local residents and environmental groups? Will renewable energies become a real alternative to oil one day?

All these questions and many others have the potential to move the market in one direction or another and we have to live with them and oil producers can only hope to negotiate the path safely.

One thing is for sure: some people will still need an extra amount of oil. I am sure some of the readers have read the story of Dubai police arresting a driver who does not only have a big car but has fitted it with an additional engine powered by jet fuel to achieve 350 kilometres per hour. As an engineer, I can only assume that the extra engine is a gas turbine and the driver only needed some wings to fly. My objection is that he should practise his driving on the Yas Marina circuit rather than on the streets of Dubai.

Gulf News



2 Comments on "Oil prices are setting their own course"

  1. Arthur on Sun, 26th Aug 2012 7:04 pm 

    MSM finally acknowledging the reality of peakoil:

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9500667/Peak-cheap-oil-is-an-incontrovertible-fact.html

  2. Frank on Sun, 26th Aug 2012 9:07 pm 

    Of course oil prices are going against the grain of the public’s expectations! That is how they make money in the markets. The public invests one way and the professionals go the other and clean up.

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