|Oil market spooked by possibilities
|Fundamentals are a factor but inflated fears of the unknown are also driving prices higher
We keep hearing the price of a barrel of crude oil is being driven by fundamentals, but yesterday offered us the clearest indication of what is really sending oil skyward.
Black gold hit yet another all-time high of $68 in after hours trading on Wednesday propelled by the dark shadow of Hurricane Katrina, which it is feared may disrupt oil supplies in the oil-rich U.S. Gulf of Mexico.
But despite the weather warning, traders indulged in a bit of profit taking yesterday sending oil down to $66.80 in afternoon trading in New York. Nothing odd about that you may think, but considering Katrina is not due to pass over the Gulf of Mexico until next week, you might be forgiven for thinking that the price pressure should remain a factor until the danger has passed. But I suppose that, as an old editor once told me, is to assume the oil market works to anything that resembles a logical pattern.
There can seldom have been a time in the last 20 years when the market was so spooked by possibilities. Sure, record demand, tight supply, lack of refining capability are primary drivers, but fear of the unknown, driven by speculators, is a major culprit in this price cycle.
As ever, traders perennial perception of Mideast instability haunts the price of a barrel of crude. The latest developments to spook the market comes in the shape of Iran's stance on its nuclear power programme which has given rise to fresh sabre rattling in Washington in recent weeks.
Meanwhile, the death of King Fahd in Saudi Arabia and ascension of King Abdullah has led some observers to fret. This stems partly from the "increased likelihood" of a terror attack in the kingdom following the death of the head of state - a fear not helped by the U.S. closing its embassy earlier this month. But there is also a widely held belief among some oil figures that Abdullah may favor higher oil prices, since it will give him additional cash to buy off increasing dissent in the kingdom.
Add in a few Gulf of Mexico hurricanes and you see a market that is working with a large risk premium.
But much of this risk remains hypothetical. Saudi Arabia has been plagued by terror groups for some time and not one drop of oil has been disrupted. And the idea that Washington really has the appetite for another military mis-adventure in the Mideast against Iran is almost laughable.
Meanwhile, fundamentals pushing the price of a barrel of crude, such as rising demand amid slowly rising supply have been a fact the world has lived with for some time. A lack of refining capacity, as I have mentioned before, has been a primary driver for at least two years, although the break down of some U.S. refineries this summer has played a part in the current price spike.
These then are the real and imagined factors that send eager futures traders diving into oil pushing the price ever higher. This price cycle is still alive and kicking, but I still believe demand will slow as oil hits the $75-80 mark, which in turn will drag the price south.
In the meantime, despite some inflationary pressures, the world is coping with high oil prices. This is partly because western economies are now less dependent on oil but also because today's price is not historically high in real terms compared to 1979-80. And back then the price doubled in six months, while in the current cycle it has taken 18 months for the price to perform the same feat. At the same time the still weak U.S. dollar has helped offset rising prices.
In the midst of its doom-and-gloom prognosis for prices earlier this month, the IEA admitted high prices had so far had only "limited" effect in reducing demand and had not reversed economic growth. Just for the record world economic growth is doing quite nicely, around 5 percent last year, its highest level in three decades, and is expected to come in at around 4 percent plus for 2005.
Spare capacity is tight, estimated at less than 2 million bpd in a market producing less than 90 million bpd. But as demand rises so to does exploration and new oil fields are expected to come on line in central Asia, Canada and the U.S. in the coming years. A report by U.K.-based energy think tank Cambridge Energy Research Associates forecast that up to 16 million new bpd could be produced within the next five years. At the same time the West is at last making moves to expand its refining capacity.
Cheap oil is still some way off of course, but don't forget, hurricanes in the Gulf of Mexico are not the only things generating hot air when it comes to the price of oil.
The Daily Star