Recently I was asked what I thought of the oil market and I said that it is destined for a longer-than-expected summer holiday as long as the driving season is sluggish and economic uncertainty persists. I added that Opec (Organisation of Petroleum Exporting Countries) reluctance to insist on more discipline is driving the price away from the desired range more often than before.

Sure enough, the July market was far from satisfactory especially in the first week where the price of the Opec basket of crude oils fell to $69.05 per barrel. Although prices rebounded to the "right side of $70 they could not attain a maximum of more than $74.44 on July 23 and the average for the month is probably close to $72.42. This is the third month in succession where prices have fallen from the April average of $82.33/b.

Although expectations for supply and demand fundamentals have hardly changed recently and the demand for Opec crude oil in 2010 is expected to be 28.7 million barrels a day (mbd) as per Opec estimations and 28.8 according to IEA, Opec's production in June on its own admission is around 29.2 mbd, which is almost 2 mbd above the agreed production ceiling for the organisation.

The only solace is that oil prices so far this year are at about $75.5/b as compared to the 2009 average of $61.06 but price behaviour in the last few months remains worrying.

Economic signals have been the biggest movers of oil prices and these have been mixed almost on a daily basis.

Although the IMF recently revised its world economic growth for 2010 to 4.6 per cent from 4.2 per cent in April citing stronger activity during the first half of the year, it still forecast 2011 at 4.3 per cent. Hardly encouraging for Opec which believes world economic growth in 2010 will only be at 3.8 per cent and that "economic data painted an uncertain picture about the strength of the economic recovery".

Weak outlook

Inside a month, JPMorgan Chase lowered by 5.5 per cent to $77.25/b its forecast for the average price of West Texas Intermediate crude in 2010 as compared to $81.75 forecast last month. It lowered its forecast for 2011's average price to $79.25 from a previous forecast of $90/b on speculation a slowdown in global economies will limit crude's potential to rise. Similarly, Barclay's Capital reduced its oil price expectations in 2010 to $82 for WTI due to persistent weak economic indicators.

The market however may get some support from what happens in the storms season in the Gulf of Mexico, which so far has been without much impact though we are just at the beginning of the season that extends until November. The approaching maintenance season in the North Sea may buoy oil prices a little, too.

Floating crude and products stocks have fallen but generally speaking stocks in the world have risen significantly to almost 5.2 billion barrels at the end of the second quarter in 2010 or 60 million barrels over the level at the end of 2009.

OECD (Organisation for Economic Cooperation and Development) commercial stocks have persistently risen in the last few months, touching 2.757 billion barrels, which is 67 million barrels over the last five years' average and sufficient for 61 days of forward consumption and 96 days when strategic stocks are included.

This in addition to the fact that Opec surplus production capacity is just over 5 mbd, will weigh heavily on the oil market in the coming months.

Considering the first, available forecasts for 2011 does not hold great expectation. Opec is only expecting a 1 mbd increase in world demand over 2010 and IEA 1.3 mbd "assuming consensus trends in world economy, crude prices and efficiency gains".

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