Business | Analysis

A highly volatile year awaits oil

The outlook is more uncertain than ever with both a price collapse and spike possible in the near term

  • By Badr Jafar, Special to Gulf News
  • Published: 00:00 December 27, 2011
  • Gulf News

Wile oil prices have remained relatively steady in the past few months, the outlook is more uncertain than ever with both a price collapse and spike possible in the near term as the global economic and geopolitical situations worsen.

At first glance oil prices look like they may have reached an equilibrium in recent months between $100 (Dh367) and $120 per barrel, in which range they have traded for most of 2011.

Yet if you ask many market participants they don't think prices are going to stay in this range. In fact there is a sharp division between those who expect prices to rise sharply and those who expect them to crash. The only thing that both sides agree on is as serious risk of a crisis of one sort or the other in 2012.

The upside risks to current oil prices are apparent from the heightened tension between the West and Iran, with recent talks about closing the Strait of Hormuz showing the volatile environment. Global oil supplies remain tight with demand continuing to outstrip supply as it has done since the start of 2010. Currently demand is only met by the steady drawing down of inventories. Hence, any interruption due to a loss of production from any geopolitical incident could directly impact prices.

Sustained recession

On the other hand, there are considerable downside risks too. The Eurozone crisis is threatening to throw the EU, an area accounting for about 24 per cent of global GDP and 16 per cent of global oil demand, into a sustained recession.

At the same time there are signs that the Chinese economy is also cooling, with its stock market down 23 per cent year to date. A resultant drop in oil demand from these regions could soften global oil prices considerably on their own, but when combined with booming US liquids production, up 3 per cent in 2011 so far versus 2010, there is a real risk of a global oversupply if the global economy falters.

What can be done to mitigate these risks?

Firstly it is important that producers act responsibly and work together with consumers to ensure the world is reliably and well supplied with crude.

Reducing risk promotes confidence critical to the global economy.

Opec's recent decision to maintain oil output at 30 million barrels per day in the first half of 2012 is a positive sign in this direction, given the organisation's previous meeting ended in stalemate.

Furthermore, it is good to see that Iraq's relationship with Opec is being normalised after over a decade in limbo.

Yet more work needs to be done to provide confidence to oil consumers facing a fragile economic future.

Best way

The best way for Gulf producers to do this is to ensure that investment in productive capacity and diversifying export routes continue so that the market can be well supplied whatever disruptions may occur.

And the best way to achieve that is to release the huge potential of the private sector to energise the region's hydrocarbon sector.

 

Badr Jafar is Crescent Petroleum's President.

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