The oil market in June "does not know what it wants to follow" according to some observers and I might add that it looks like a goalless draw in the World Cup and the game has to go on to extra time.

There were so many conflicting signals in June that it really is difficult to judge the direction of the market. Oil prices somehow recovered some of the losses of early May but nevertheless were very volatile with a standoff between ups and downs.

The price of the Opec basket of crude oils started the month at $70.98 a barrel, but after some yoyo movement it reached a maximum of $76 on June 21 only to soften again and end the month on $72.51.

More importantly, the average for the month was $72.97 as compared with May average of $74.48 and April average of $82.33. The market is therefore on a downward trend and the chances are that it will continue to be so for some time.

The conflicting signals in the market relate essentially to regularly released economic indicators where some are positive one day and others are negative the next.

In the Eurozone manufacturing is sluggish and was less in May while unemployment reached 10.1 per cent in April. The European debt crisis and the downgrading of some countries' rating had a lot to do with the above decline in prices.

However, Moody's classification of Greece debt as "junk" has been described as "rubbish" by the European Union's Economic Commissioner and the European Central Bank president said that "the Eurozone has a strong programme in place to help debt-laden countries like Greece".

Overbuilding

Even in China there are doubts about the sustainability of oil demand as the government tries to cool the economy and the property market is in danger of losing its vitality due to overbuilding. Yet the government raised its expectation for economic growth in 2010 to 9.1 per cent from 8.7 per cent earlier and Reuters reported that China exports in May increased by 50 per cent over a year earlier.

As for currency, the oil market was again affected by the movement of the dollar against the euro though it seems that the exchange rate is now stabilised or moving in a narrow range. Suddenly oil producers and consumers have to worry about the stock market as it has become recently a mover of oil prices.

Theoretically and historically there has not been a relationship between oil and share prices. However, prices of both have been moving recently in tandem such that one observer said "everything depends on Dow Jones" and this indicator has fallen in the last few months.

Forecasts

On the fundamentals side and even with the approaching driving season there have been only minor changes in the forecasts of IEA and Opec such that the call on Opec crude this year is estimated at 27.7 and 27.8 million barrels a day (mbd) by the two organisations respectively. Oil demand has almost recovered to the level of 2008 but the uncertainty about the economic recovery could still bring some surprises.

Crude and products stocks are high and well above the five years average especially that Opec production is the highest since 17 months at 29.37 mbd including Iraq and 2.19 mbd above the ceiling of 24.84 mbd set for the organisation excluding Iraq.

The market was supported by Bernanke, the chairman of the Federal Reserve's statement regarding limited impact of the European situation on the US recovery and the fact that interest rates will be kept low to enhance the moderate recovery.

At the same time there are signs that car sales are recovering. Researchers Alex Partners are estimating car sales in 2010 to reach 68 million units or 7 per cent over 2010 in spite of a 10 per cent decline in Europe. The number is likely to rise sharply to 87 million units of sales in 2014.

Opec Secretary-General Abdullah Al Badri described the level of prices as "comfortable" just before the latest declines but he asserted that more discipline is needed with respect to production level by each member country. Saudi Arabia's Oil Minister Ali Al Nuaimi said that prices will stay in the "ideal realm" of $70 to $80 per barrel.

While the US financial reforms are seeking "strict rules that prevent big banks from placing reckless bets on oil prices", trader Stephen Perkins of PVM towards the end of the month was "drunk trading" at night and sending prices very high before the situation was corrected the second day after his company lost $10 million.

He was fired for "unauthorised" trading and perhaps fines for driving under the influence will now be extended to trading under the influence.

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