There are fears that an escalation of hostilities between Israel and Iran could set off a conflict across the region and send oil prices skyrocketing.
In the same breath, markets were also seen fretting over an economic slowdown in China, especially after Chinese Premier Wen Jiabao said recently that the government will target an expansion of 7.5 percent in 2012, the lowest in eight years.
A deeper slowdown in China, the world's second biggest economy, would definitely impair a global expansion that is already faltering because of Europe's debt crisis.
China is the world's second largest consumer after the US and has been the engine of strengthening demand, while the now melting euro zone accounted for nearly 16 percent of global oil consumption in 2010, British Petroleum data indicated. And the data, pointing to the euro zone possibly slipping back into recession further, too weighed on prospects for future oil demand growth.
All this continued to weigh upon the markets, exerting opposing push and pulls.
And the emerging scenario, especially the impact of the Iran scenario, has forced the US Energy Department to increase its oil price projection for 2012. West Texas Intermediate oil will average $105.71 a barrel this year, up 5.3 percent from the February projection of $100.40, the department's Energy Information Administration said in its monthly Short-Term Energy Outlook. The US benchmark grade will average $105.75 in 2013, up $2 from the prior month's estimate.
Giving a spin to the overall situation, Eric Kreil, EIA international oil market analyst in Washington, who helped write the report, said: "We think there's more than just Iran behind the rise in prices. This is a tight market. We've had a number of outages in non-OPEC countries and are looking for demand to rise."
And this is despite the fact that both — the short term and long term supply horizon — appear fairly strong, as a new energy era is about to herald in US, the world's largest consumer.
"Energy self-sufficiency is now in sight," says energy economist Phil Verleger.
He believes that within a decade, the US will no longer need to import crude oil and will be a natural gas exporter.
Energy companies utilizing techniques such as hydraulic fracturing, along with horizontal drilling, are unlocking vast oil and natural gas deposits trapped in shale in places like Pennsylvania, North Dakota and Texas. North Dakota, for instance, now produces a half-million barrels a day of crude oil and production is rising.
Saudi Arabia is also beginning an oil exploration push expected to turn up additional 100 billion barrels of new oil in existing fields in the Kingdom and in unexplored regions, including in the Red Sea. The effort is also expected to increase the company's natural gas production by 40 percent by 2014.
Amir Nasser, Saudi Aramco's senior vice president, while outlining the plan in a recent speech at CERA Week, said geological surveys suggest the oil will be found in "frontier" areas in the Kingdom, including in the shallow and deep waters of the Red Sea. Nasser said shallow-water drilling has begun already and that deep-water drilling will begin later this year.
"We are very optimistic about the potential for significant discoveries."
He said that improved oil extraction techniques will allow the country to pull 70 percent of the oil from its existing fields, up from the current 50 percent.
Iraq's oil production is also touching the highest level since 1979.
It has surpassed the three million barrels per day (bpd) mark, Iraqi energy officials said recently in Baghdad.
"Oil production is now over three million barrels per day," Hussein Al-Shahristani, Iraq's deputy prime minister for energy affairs, said in a speech at the oil ministry. Iraq's current production "is the highest since 1979," Oil Minister Abdelkarim Al-Luaybi said.
Iran, in the meantime, has also announced the discovery of one of its biggest oil fields with high quality crude in a southern province, Iranian Mehr news agency quoted an official as saying on Saturday.
"The preliminary studies show enormous crude reserves in this oil field, which can be considered as one of Iran's biggest fields," Mahmoud Mohaddes, head of the exploration office at the state National Iranian Oil Company (NIOC) said.
Iran is looking to discover 2.5 billion barrels of recoverable oil and 23 trillion cubic feet of gas in the course of the country's fifth five-year development program (2010-2015) now under way. And all this meant considerable incremental supplies on the horizon.
And apparently it was in this perspective that Jim O'Neill, the Goldman Sachs economist who a decade ago invented the term "BRIC" believes price of oil will fall in the next few months as fears over Iran fade.
He said five-year indicators for oil supply and demand indicated a price between $80 and $100 a barrel.
"This raised in my mind that all the premium above this was due to other market forces, perhaps in addition to the Iran uncertainty, and some consequences of expectations of a third round of quantitative easing (QE) in the US."
Despite the creeping supplies and crumbling demands, markets are reacting to events — much beyond its control. And the volatility is adding to the global worries in a melting economy. High crude prices have often been followed by a recession — and this time could be no exception.
And the rising output from all around, still point to a firm demand - supply balance, indicating markets will take a plunge — once Iran is off the board. And this is what O'Neill may have in mind, while pointing to a softening market over the next few months.
Crude markets are entering an interesting phase — worth watching over — rather closely!
