The shocking $11 plunge in crude oil prices was recorded amidst some negative economic news hitting jittery markets.
It was drama all around.
Almost seven weeks of gains were erased as crude went through its second biggest drop in a day on record. Brent went down by more than $10. At one point it gave up $12, its biggest fall ever — although late recovery helped it take the second slot in this ‘coveted’ list.
Consequently, the prices dropped below $100 a barrel for the first time since mid-March.
Crude futures ended the week down 2.6% further at $97.18 a barrel on the New York Mercantile Exchange.
Oil had gone through wild swings in recent months, basically because of inflation, speculation and indeed the Middle Eastern turmoil.
There was no fundamental demand issue to cause its spike to $115 over the past two months.
Oil markets were particularly due for a price correction; it now seems, after rising more than 30 percent over the past year.
Apparently, weak economic news and a strengthening dollar contributed to the bursting of the bubble. “Pop goes the bubble,” said Michael Lynch, president of the firm Strategic Energy and Economic Research.
“It seems unlikely you will see any tightening in the market in the coming months. The worst of the political threats have passed us.”
In the meantime, a variety of government and private surveys indicating the declining gasoline demand over the past month by between 1.2 and four percent from a year ago, coupled with the Energy Department reporting higher crude inventories last week by 3.4 million barrels, largely because of easing gasoline sales, apparently helped in denting the market spirits.
Crude markets have rarely been exposed to such vagaries. Only twice before, in the recorded history, such dramatic events had been witnessed by the crude world.
On September 29 2008, just before the recession took hold of the world, US crude futures dropped $10.52 a barrel.
This drop was recoded after the US House of Representatives voted down the $700 billion plan, proposed to prevent the meltdown of the faltering financial markets.
In fact the US crude had only posted a huge $16 a barrel one-day gain days earlier, on optimism over the prospective bailout package. And before this, on January 17, 1991 to be specific, the US crude fell $10.56 a barrel, in response to a US decision to release stockpiles of crude from its massive Strategic Petroleum Reserve to compensate for supply shortfalls.
The move was made just prior to the commencement of hostilities, in the run up to the first Gulf War.
Interestingly, this time the crude markets collapsed despite a significant fall in output over the last months — apparently underlining the state of the market.
This was significant in more than one ways.
A recent Reuters survey reported that OPEC output fell for a third month in April on account of the ongoing fighting in Libya and field maintenance in Angola.
And this was despite extra oil from Saudi Arabia and Nigeria.
Supply from all 12 members of the Organization of the Petroleum Exporting Countries averaged 28.42 million barrels per day (bpd), down from a revised 28.48 million bpd in March, the survey of oil companies, OPEC officials and analysts found.
Saudi Arabia’s output in March was also 700,000 bpd lower than first estimated — apparently for demand reasons.
OPEC output has fallen for three months now since reaching 29.63 million bpd in January, the highest since December 2008. Definitely OPEC is conceding its limitations, almost helplessness, in controlling the markets. Too many variables are now impacting the entire energy equation — much beyond the control of any single force.
And OPEC also seems to have given in to the fact that markets are now almost beyond its control. New efforts are required to get the markets back to senses — in the control of the fundamentals.
“OPEC seems to have somehow resigned from playing an active role in price formation, leaving it up to the market, including speculative players,” underlines Pierre Terzian of consultancy Petrostrategies.
And it is in this perspective that one views with interest and indeed anxiety that the UN is suggesting the G20 to negotiate a benchmark “fair” cost of oil with the OPEC to limit price movements within a band.
The G20 needs to “act decisively to moderate the volatility of oil and food prices,” the agency said in a statement while releasing the annual report on Asia and the Pacific in Bangkok last week.
The UN says rising food and oil costs threaten to drive millions more people into poverty in Asia, most severely affecting the populations of nations specifically in Bangladesh, India and Nepal.
The G20, a group made up of the European Union and 19 of the world’s richest nations, could also regulate commodity markets to reduce speculation and “discipline the conversion of food into bio-fuels,” the UN said in the report.
Indeed rising oil prices are putting pressure on the poorer section of people in many developing countries. These need to be taken care of — none can argue — not even the producers.
However, the point to underline here is that in a free market scenario, prices are not to be “negotiated.”
This may deem closer to price fixing.
Fundamentals need to take over the markets — so as to ensure a fair price.
Indeed it is easier said than done, this scribe too has to concede. Yet efforts need to be made in that direction.
The important aspect of the energy markets is to try and prevent non-fundamentals from acquiring control of the markets — as seems the case now. A tall order indeed — but movement in the direction is highly desirable. Why not now?
