Oil markets seem to be getting back to some senses finally. After hitting $112, prices plunged, rather abruptly, to even below the $100 mark. What a sudden transformation indeed!
At a point, hardly a couple of week back, oil markets seemed to be continuing to march forward, without any hindrance and interruption. No one knew where it would stop. But then almost all of a sudden, to every one’s surprise and indeed comfort, markets seem to have taken a U-turn and an abrupt one. Indeed market fundamentals changed the scenario — almost overnight — if one could dare say so, underlining once again the crude markets were not in control of the simple demand — supply dynamics. There are additional, extra-market forces, controlling the markets in a big, big way.
Last Monday, when the markets resumed after the western weekend, oil prices continued to plunge, before recovering over the last few days. The downward price slide continued, from the earlier week’s record, to 10 percent amid a recovery in the US dollar and lingering worries over slowing energy demand.
The current global economic woes are an interesting case study. It is being looked at closely, with some equating it to the Japanese economic stagnation of late 80s and early 90s while others are comparing it with the stagflation the US economy faced in the 70s and 80s. And while some watched it closely for parallels with the Great Depression, yet with the integrity of the banking system under increasing question today, some are referring it to the banking panic of 1907. Elements of all these crises are making virtually every economic analyst nervous and edgy. And crude could not remain oblivious to all these.
The recent weakness in oil was tempered by a recovery in US stock markets, after US February existing home sales was reported to have risen by more than expected. On the other, crude markets went soft also on signs that the slowing US economy may cut fuel demand in the world’s biggest energy-consuming country. A US government report on March 19 showed that US fuel demand in the four previous weeks was down 3.2 percent from a year earlier. There are indications now that oil is likely to slide further this spring as lower economic growth seems to be encouraging traders to exit commodity markets, Goldman Sachs Group Inc. said in a report on March 20. This may ease some of the speculative pressures off the crude markets too.
Other factors also seem to have contributed to this rather abrupt change in global crude market dynamics. And Saudi Arabia joined in with its bit too, for too long a Bull reign in the crude markets could have put in jeopardy the global crude demand scenario, every one here realized too.
Hence in the immediate aftermath of the US Vice President Dick Cheney’s visit to Riyadh last week, a Saudi Supreme Council for Petroleum & Mineral Affairs meeting headed by none other than King Abdullah, custodian of the two holy mosques, himself reiterated the kingdom’s commitment to stabilizing the international oil markets “by ensuring adequate supply.” The council “emphasized the Kingdom’s desire for oil market stability and ensuring supplies to different regions at all times to maintain world economic growth.”
The meeting also reviewed progress in development projects being carried out currently to enhance Saudi crude output and spare capacity — so very essential for soothing the nerves of the itchy market. Indeed the reiteration of the Saudi stance helped ease the jittery market, one cannot miss out mentioning here.
During Cheney’s two-day visit to Riyadh and meetings with the leaders reviewed “what could be done shorter term, but probably more about what’s necessary to do over the medium and longer term,” a senior US official was quoted as saying after the meetings. The focus of the discussions was definitely on future developments. Saudi Arabia has already announced it was endeavoring to increase its production to 12.5 million bpd from the current 11 million bpd. And some reports do indicate that there was now a push to get the additional volumes on stream even before the announced schedule.
In the meantime, as the US Fed engineered the bail out of Bear Stearns, easing the fears of international banking meltdown, and the Federal Open Market Committee’s (FOMC), a component of the US Federal Reserve System, subsequently cut 75 basis point interest rate, the bubble in commodities — crude, gold, wheat, zinc, platinum — just to name a few, were dealt double blow, contributing to the easing of the crude markets too.
The sheer speed and magnitude of the move in crude, gold and some other commodities suggest that hedge funds have rather deleveraged, to some extent at least, their bets with borrowed money in the commodity markets. Fund managers seem to have received the cue that Fed cannot risk inflation and hence the rate cut cycle could now well approaching it end.
With at least some speculators leaving commodities, including crude, despite some firming up of the markets over the last few days, some respite in the global crude prices could not be ruled out altogether in the short to medium term.