Business | Oil & Gas
Opec avoids price collapse despite falling demand
While crude oil sold strongly after Opec's decision to slash production by 2.2 million barrels per day (bpd), it is likely Opec avoided a major price collapse, as world demand continued to sink.
- By Dalton Garis, Special to Gulf News
- Published: 23:51 December 21, 2008
While crude oil sold strongly after Opec's decision to slash production by 2.2 million barrels per day (bpd), it is likely Opec avoided a major price collapse, as world demand continued to sink.
The selloff after the announcement can be seen as technical, tied to the expiration of the January contract in New York, and the contrarian behaviour of markets to "buy the news and sell the fact."
If traders know this rule of thumb exists, many will sell to stay ahead of the expected price decline, and in fact prompt the decline by their own actions.
On Friday the January contract ended, forcing longs to liquidate their January positions or roll them over into February contracts. This caused the January contract to be weak relative to February.
Russia
Markets also gauged Russia's cooperation with Opec as lukewarm. Russia committed to a modest 400,000 bpd cut despite being the second largest exporter at 9.4 million bpd.
The cuts, to take effect from January, will take anywhere from six to ten weeks to be seen in the marketplace. That could put us into late February or early March, a time period when oil demand is seasonally low as refiners prepare to change over from middle distillate to gasoline production. This is another reason markets were less than impressed with Opec's announcement.
The world economic slowdown is in its earliest stages; and the resulting demand reductions are not yet known with any certainty. Rising cash or spot prices are influenced by future expectations; but today, with falling prices, we see a strong contango pattern, with back delivery month prices far higher than the nearbys.
The market planning horizon seems to be no more than six months out from today. Adding to the gloom is the latest US energy Information Administration's estimate of very modest oil demand growth in the US over the next few decades.
Price gyrations
Locally, the DME Oman benchmark crude nearby contract closed for the week. The basis for the price gyrations in local markets is due to the unknown economic situation in the Far East, the Gulf's primary customer base.
Japan is fighting severe difficulties; and its currency is at historic highs against its main customer's currency, the US dollar, depressing US imports. But the rest of the Far Eastern economies, especially China, remain in question as to how deeply will they be hurt by the world economic slowdown, specifically, if China can succeed in generating sufficient domestic demand to offset at least some of its export reductions.
Russia is pressuring Ukraine for natural gas payments, threatening Eur-opean deliveries.
The New York Mercantile Exchange's nearby natural gas contract closed last week at $5.59 per million Btu (Dh20.53), up marginally from the previous week's close of $5.48.
Russia last week stepped up renewed demands on Ukraine to pay more for Russian natural gas, five times more per unit than current price payments.
Meanwhile the hrivna, Ukraine's currency, narrowly avoided collapse as the central bank announced aggressive steps to shore it up. Since Ukraine is on the shipment route for much of Europe's Russian natural gas, it is a worry whether Ukraine will divert Russian gas to its own network in response to Russian cutoff's of Ukrainian gas imports.
- Dalton Garis is Associate Professor of Economics and petroleum market behaviour at the Petroleum Institute, in Abu Dhabi
Share this article
Related Articles
More from Oil & Gas
More from Business
Popular in Business
-
XPRESS
Way to go this DSF
A fun-filled route to guide you to all the happening dos in town
Business Editor's choice
-
What to expect at the Dubai Airshow
We preview what types of aircraft to expect at the Dubai Airshow
-
Air Arabia revamps its website
Upgraded site offers new features, accessible in range of languages
-
Dubai looks ahead to 2010 with new projects
Global visitor numbers up 4% on year and occupancy rates remain strong
