Complex dynamics spur oil price surge
A depreciating dollar has played its part in spurring oil prices that have risen to near-historic highs.
As long as the dollar takes a beating, crude prices will continue to move upward. At this time, there are no signs of a let-up in the dollar’s fall, according to the Barrel on the Roll report released by Riyadh-based Falcom Financial Services.
Crude oil prices briefly crossed $99 per barrel last month before retreating. Volatility in prices notwithstanding, crude is showing an upward bias. Dynamics of oil are beyond simple demand, supply and logistics.
Falcom Financial Services anticipates crude prices will pass the important milestone of $100 per barrel before the end of 2007.
The Falcom report said the Federal Reserve action of reducing interest rates released the pressure on the crude market. Anticipation of further cuts and focus on economic growth as against inflationary pressures earlier have boosted the prospects of sustainable demand.
Prices are further buttressed by the pegging of the Gulf Co-operation Council currencies, except Kuwait, with the US dollar. Speculative money in search of a safe haven has also fuelled oil in recent times.
The report said fears of the US sub-prime loan crisis becoming a drag on financial markets, fall in crude demand on rising prices, better stocks in the US than a year before and shift to alternative sources of energy have had little impact on prices.
Fundamentals do not justify the current run, according to the Organisation of the Petroleum Exporting Countries. Opec decided to maintain the group’s current output of 27.25 million barrels per day at a closed-door meeting held in Abu Dhabi last week.
“Having reviewed the oil market outlook, including the overall demand-supply projections for the year 2008… the conference observed that market fundamentals have essentially remained unchanged, with the market continuing to be well supplied,” said an Opec statement after the meeting.
According to current estimates, more than three-quarters of the world’s oil reserves are located in the Opec member countries. Their proven reserves currently stand well above 900 billion barrels. The bulk of these reserves are located in the Middle East, with Saudi Arabia, Iran and Iraq contributing 56 per cent to the group’s total.
Most analysts underestimated the strength of demand. So far, any drop in the US demand is adequately compensated by higher consumption in the Middle East and China.
Subsidised pricing by the governments in these countries may change at some point in future amid rising prices. China has already raised fuel prices by 10 per cent on November 1. India is expected to follow suit.
According to the Falcom report, geopolitical conditions in the oil producing region first came under strain when the US was looking to enter Iraq in 2003.
Disturbances in Nigeria and Sudan, US-Iran nuclear standoff, Israel-Lebanon war, changing policies in Venezuela and emergence of Russian backing to the prices have at various points in time offered valuable support to the oil market.
Globally, strong liquidity conditions are in place for more than five years. Lower cost of funds has greatly extended the bullish run in the oil market.
Moreover, spare production capacity is limited and shared by a few players.
Despite well-stocked US inventories, traditionally higher demand in the fourth quarter due to winter season raises concerns over future replenishment.
Snehdeep Fulzele, head of research at Falcom Financial Services, said: “Opec has played a key role in balancing demand and supply. Shortage of refining capacity in the world, weather conditions and a surge in demand from the emerging economies of India and China have put pressure on the supply side.”
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