Volatility in the oil market continues along expected lines. The rally in oil prices in the second half of December 2009 and the first ten days of January this year has fizzled out. Oil has followed a declining pattern to the end of January.

The highest price for the Organisation of Petroleum Exporting Countries (Opec) basket of crude was $80.29 a barrel on January 11. Prices started to fall persistently to the level of $71.4 on January 28. The last four days have seen marked resistance against a further decline. The average for the month could be close to $76.27, still higher than December's average of $74.01.

The US market still determines the daily movement in oil prices and is sensitive to the slightest remark or announcement. Therefore, a decline in US gasoline demand is a reason for the whole market to head down. Gasoline symbolises weak demand in a country where the Energy Information Agency (EIA) reported a 2 per cent decline in oil demand in the four weeks up to January 22.

Even a drawdown of US stocks was not sufficient to boost prices as inventories are still well above the previous five-year average. The stronger dollar in the last few weeks and speculators moving into the currency market are seen as another reason for falling oil prices.

Surely, the end of the cold spell has removed the ‘winter premium' although another cold spell could still come in February.

On the fundamentals side, the world economy is expected to grow by more than 3 per cent this year. The International Monetary Fund has even pointed to growth of 3.9 per cent in 2010 and 4.3 per cent in 2011. The World Bank expects growth at 2.7 per cent, but is expected to review this figure.

Expectations

As to the oil market, expectations have not changed much. Demand in 2010 is expected to rise by 0.8 mbd (million barrels a day) according to Opec. The International Energy Agency (IEA) expects a 1.4 mbd rise while the EIA expects 1.1 mbd.

This will slightly improve the call on Opec crude to 28.6 mbd according to Opec and 29.12 mbd according to IEA. All forecasters expect the market to tighten further as 2011 approaches.

Almost all analysts expect better oil prices this year over 2009 although some have widened the range where prices could move to as wide as $40 to $100 per barrel. But the majority could be grouped in the range of $75 to $85 per barrel, a range in which Opec will be comfortable not only in terms of revenue, but for future investment.

The Commodity Futures Trading Commission (CFTC) proposals to curb oil speculation is unlikely to have affected prices recently as the process is seen as limited and very slow before it becomes law, if ever.

The majority of banks are against the proposals as they maintain that speculative activities have nothing to do with the increase in oil prices.

The Dresdner Bank analysts are an exception.

But Opec is certainly worried about the recent slide in prices.

Opec production in December was 29.12 mbd, the highest since December 2008, which means that compliance with agreed production allocation has gone down to below 60 per cent. Shokri Ganem, the chief of Libya's national oil company, is asking for compliance of up to 85 per cent as seen in early 2009. At the next Opec conference in March 2010, no one expects Opec to alter its supply agreements, but members will surely be asked to stick to their agreed allocations.

Falling inventories, dumped floating storage oil and the approach of the weak demand season must make Opec act decisively if it wants to maintain oil price movement in the desired range.

 

The writer is former head of Energy Studies Department in Opec Secretariat in Vienna.