To begin with – crude markets were on a losing streak. Oil, trading as high as $87.15 a barrel on May 3, dropped to as low as $64.24 on May 20. At one point crude prices had lost about 26 percent in prices this month. This was definitely steep. Speculators began rushing to safer havens. The euro zone contagion and the strengthening dollar were seen carrying the day – with some predicting oil to touch the low 60 zone.
This would definitely have made many uneasy – as in recent months a rare consensus seems to have emerged between oil producing and consuming countries, as well as the oil majors to stabilize oil prices in around $65 to $85. Anything below this could be detrimental. This level is seen as necessary to restrict demand destruction and substitution; provide sufficient cash flow and incentives to bring on costly deepwater and other hydrocarbon sources in the medium term; and support the deployment of cleaner technologies such as wind, solar and carbon capture and storage (CCS). Prices much lower are unlikely to be sustainable because they would stunt development of higher-cost oilfields as well as supplementary energy sources such as tar sands and clean technology that will be needed to meet medium-term energy needs.
Yet exactly the same happened. Prices crossed the Rubicon and went below $65. But as US data signaled that the economic recovery was gathering pace and may revive fuel demands, the markets swung back – rather wildly, rising above $75 a barrel for the first time in two weeks.
Oil gained the most in eight months this Thursday after China said it’s maintaining the European assets and denied the report it’s reviewing euro holdings. The Commerce Department in Washington reported the US economy grew for a third consecutive quarter and the Labor Department said jobless claims declined. And the markets were seen bullish - despite as per a Bloomberg survey OPEC’s output advancing to a 17-month high in May. In fact at a point in time oil jumped 8.4 percent in two sessions, halting a 20 percent decline since May 3. This was massive!
Oil also climbed as President Barack Obama said he is extending a moratorium on deep-water oil drilling permits, delaying proposed exploration in the Arctic off Alaska and canceling a plan to search for oil and gas off the coast of Virginia. The move, which could curb long-term supply, also led to the bullish psyche, analysts felt.
But by the last session of the week, markets had started to change outlook once again. US crude oil futures ended lower on Friday, posting their worst monthly loss since December 2008, as a downgrade of Spain's credit ratings and disappointing US economic data fueled investor caution about riskier assets.
And at this point, the biggest two-day rally since August was snapped – after reports showed spending by the US consumers stalled in April. Oil retreated from a two-week high following the US Commerce Department report that purchases were unchanged last month, the first time without a gain since September.
The swinging fortunes also generated ripples. In fact earlier the month, as oil prices dived into the low 60s and some suspected a possible OPEC intervention, the interesting debate – what is the OPEC floor – reared head too? The group needs to provide a "clear signal” of a price floor to avoid investors pulling out of the oil market, J.P. Morgan Chase & Co. said in a research note. Others said finally the markets have found a floor.
Yet, all through this zigzagging, this seesawing, OPEC remained calm – realizing fully well that fundamentals may not permit oil to go much below the target price – for long.
OPEC ministers were “not yet” concerned. Minister of Petroleum and Mineral Resources Ali Al-Naimi, had already indicated on March 30 that he hoped prices to remain in the $70 to $80 range. Finance Minister Ibrahim Al-Assaf reiterated the same on May 18 insisting, he’s “not worried.” OPEC Secretary-General Abdalla El-Badri has said that prices of between $70 and $90 are reasonable to encourage producers to expand exploration. OPEC planned to do "nothing” about the prices, the Kuwaiti Oil Minister Sheikh Ahmad Al-Abdullah Al-Sabah told reporters. The oil price slump has been caused by uncertainties linked to the financial crisis in Greece and not to crude supply and demand, Algeria’s Oil Minister Chakib Khelil said May 19, echoing comments from Qatari Oil Minister Abdullah bin Hamad Al-Attiyah. Mohammad Ali Khatibi, the Iranian governor to OPEC, too underlined, the European issue was the prime reason for the steady decline in crude oil prices.
And there were reasons for this OPEC complacency. Fuel demand was rising. About 28 million people are expected to be on road trips during the upcoming three-day holiday weekend in the US, a jump of 5.8 percent from a year earlier and the first increase since 2005, according to AAA, biggest US motoring organization, which calculates the period over five days, until the Memorial Day on May 31. Total fuel demand rose 0.6 percent to 19.7 million barrels a day in the week ended May 21, according to a report from the Energy Department. Then Cushing stockpiles slipped 324,000 barrels to 37.6 million in the week ended May 21.
Oil prices have been extremely volatile this entire month. And major players hate this. This volatility is beyond the control of mere fundamentals. This is a complex equation. And the fact remains – producers have little sway on the wild swings. And one has to come to grips with this stark reality – there is just no way out!
