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 four weeks, demand for distillates in the United States, the major global consumer, has risen nearly seven percent from last year while gasoline consumption is also up by 2.5 percent.
Late last week, 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 millions barrels a day. However, the previous OPEC decision to increase its output by an additional 500,000 barrels a day 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 Corp. 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 million, eight percent above the year ago levels. There are also indications that the underlying factor for the market behavior, 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.
