by Syed Rashid Husain
30-06-05
Riding on robust demand, speculation that refiners and producers would struggle to meet winter heating oil requirements later in the year and the rise in power of the conservative, hardliner Mahmoud Ahmadinejad in Tehran, oil prices finally breached the $ 60 a barrel psychological barrier and are still on an upswing.
Tight market conditions are expected to continue for at least some more time.
Over the past weeks, demand for distillates in the United States, the major
global consumer, has risen nearly 7 % from last year while gasoline consumption
is also up by 2.5 %.
Earlier, the US Energy Information Administration (EIA) predicted that oil prices would continue to remain at levels higher than $ 50 a barrel for the next 18 months. Recent EIA figures showed higher US gasoline demand this year despite the higher prices.
Oil's roller-coaster run this year -- starting $ 42 in January and crossing the
$ 60 mark within six months -- has set the world's energy experts adjusting
their outlooks. To a number of people the current bull run in the energy markets
are baffling. It is not fundamentals that alone could be held responsible for
the currently tight crude markets.
Although Saudi Arabia once again underlined a couple of days back it was ready to increase its output further from its current daily average of 9.5 mm bpd. However, the previous OPEC decision to increase its output by an additional 500,000 bpd did not have any real impact on the market sentiments and many now feel that any additional output increment by OPEC may also go unnoticed and may not have the desired impact on the crude markets.
There are people within the energy fraternity who are of the firm opinion that
the available supplies are in excess of demand. There is no dearth of supplies,
it is often underlined. In fact some go to the extent that there are no buyers
in the market for the available crude.
Even the Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi is on record having said that Saudi Arabia has the capacity and the will and is ready to supply crude to anyone who wants to buy it in the market place. Hence adequate supply of crude is not the issue. There is plenty available and there are no takers for them.
And here is the catch! Despite this fact if the markets continue to behave
rather erratically then there are definitely reasons much beyond the control of
the oil producers and this point is currently being driven home.
People are starting to argue now that not only the markets are currently well oiled; rather it is so well oiled that over the next few months, the markets could experience a real dip. There are analysts saying prices could go down to $ 40 a barrel -- ultimately -- leading the producers scampering to rein in production in not too distant a future. Arguing that the supply side is not the real reason for the current woes of the market, these analysts insist OPEC needs to be cautious while making its next moves. Increasing the output may disturb the supply-demand balance, they say.
Though on one hand, Goldman Sachs earlier this year predicted that oil prices
could shoot up to $ 105 a barrel, oil majors such as ExxonMobil maintain that
the price of oil, like that of any commodity is cyclical and will fall back to
more normal levels over the long term.
There are reasons behind this line of thinking. In the United States, crude supplies stand at 327.4 mm, 8 % above the year ago levels. There are also indications that the underlying factor for the market behaviour, the extremely thin supply cushion -- could also begin to dissipate in 2006.
Major differences in reading the market signals are definitely there. To some it
largely depends on which side of the divide you are looking at. However, there
seems, finally, some light at the end of the tunnel. Despite what Matthew
Simmons & Co. continues to predict, there are people who feel exactly to the
contrary. Market fundamentals may undergo a major readjustment in medium terms
and the OPEC cannot overlook this fact completely.
Source: Arab News