After some months of relative stability and gradually rising oil prices, the market went into a tail spin in May where oil prices dropped by almost 20 per cent compared to earlier days in the month.

Prices for the Opec basket of crude oils reached its zenith on May 3 at $84.36/b, driven by April momentum, only to tumble sharply to $66.84/b on May 25.

This is the sharpest decline in a long time and although prices recovered to $70.48/b two days later, May average is likely to be close to $75/b as compared to April average of $82.23/b.

This roller coaster is driven by the sudden and great concern about Greece's financial situation with respect to sovereign debt and the realisation that the problem could engulf other countries such as Portugal and Spain and later even Ireland and Italy were included.

Support

The move of the European Union to salvage the situation was, at least at the beginning, reluctant, though it ended with a hefty support of $146 billion together with the IMF, in addition to the creation of a large fund of almost one trillion dollars to tackle problems of similar nature in other countries.

As the Greek situation began to be resolved, Spain's debt rating was slashed and the government announced some austerity measures.

Europe's situation brought about a large sell off in global stock markets and the strengthening of the dollars where exchange rate moved from about 1.4 dollars to the euro to as little as 1.23 over a short period in time.

All this acted to pull oil prices further down and cause concern but not panic among oil producers.

Positive economic data outside Europe may have slowed down the fall, as the US economy is seen to have grown by 3.2 per cent this year. The decline in stocks prices has not yet warranted a revision of this outlook.

The stock market's drop was seen as a weakness in the economy, but markets have somehow recovered most of their losses.The Energy Information Administration of the USA even reported recently that oil prices are forecast to rise by 10 per cent over this year and next or from $78.64/b to $87/b by the fourth quarter of 2011.

Not much change is reported by Opec or the IEA on the fundamentals side. While Opec kept its demand forecast, IEA reduced theirs by 190 thousand barrels a day (kbd) from both 2009 and 2010 numbers.

The two organisations are now estimating the call on Opec oil in 2010 at 28.8 million barrels a day (mbd) and 28.7 mbd for Opec and IEA respectively. At least here the differences are minimal.

Reversal by demand

The price slide may have been slowed down or even reversed by growth in Asia and the growth in oil stockpiling in China, where end of April stocks were 228 million barrels or 45 million barrels more than two years ago.

In this situation most Opec ministers agreed that there is not much Opec can do or should do. But if the price slide resume and prices settle at lower levels, then Opec may feel compelled to call a meeting to attempt to stabilising the market.

In fact all Opec needs to do is insist on its members to abide by their agreed production levels where compliance now has slipped down to 55 per cent.

This means that Opec is over producing by as much as 1.95 mbd from its agreed production level of 24.845 mbd.

The April 20 oil spill in the Gulf of Mexico, while it took most of the attention in the media, had very little impact on prices at the end of April and beginning of May.

But as soon as the market realised that it will have no impact on immediate supplies, it discounted this issue from any short term price analysis especially since the incident has not yet affected the shipping lanes in the Gulf.

However, all analysts agree that the catastrophic incident may impact future supplies from offshore resources as new regulations and concerns about safety may slow down venturing into deep waters in addition to the rising costs and risks to oil companies.

In the coming months, the oil market, and the world economy, will largely depend on what will happen in Europe.

If the Greek problem is prevented from spreading to other countries and the Euro is stabilised relative to the dollar, the stock market and oil prices may improve to recent month's levels. Baring that, please fasten your seat belts.

 

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