For a very long time, no analyst has seen the oil market as stable as it was in October. Prices, though breaking the psychological barrier of $80 (Dh293.8) per barrel ($/b), moved in a narrow range such that the highest price for the Opec basket of crudes was $81.51/b on October 6 and the lowest was $78.54/b on October 22. Therefore the average for the month is just below $80/b. This is a significant improvement over the $74.63/b average for September.

Yet the market remains concerned about the economy and the Opec Conference on October 14 declared that "whilst economic recovery is underway, there is still considerable concern about the magnitude and pace of this recovery" and that "market fundamentals remain weak, refinery utilisation rates are low and product inventories have risen considerably."

As expected Opec kept its production ceiling, for all members except Iraq, of almost 24.8 mbd intact though actual production is about 1.8 mbd higher and the conference statement did not even ask member countries to abide by their agreed production levels.

Beside the state of the economy the market was driven by the fluctuations of the dollar with respect to other currencies.

It is now accepted wisdom the inverse relationship between the dollar value and the price of oil. An appreciating dollar towards the end of October to $1.39 to the euro caused prices to fall accordingly.

But nobody is sure where the dollar is heading and the prospect in the United States of more quantitative easing, the respectable term for printing more money, is weighing on the market before the meeting of The Federal Reserve tomorrow.

Analyst Eithne Treanor says "if the Federal Reserve introduces another stimulus plan, the dollar is likely to decline again" and therefore oil prices may rise accordingly.

But will other countries especially in Europe just stand idle and see the dollar go down or are we heading into a currency war, a prospect the G-20 meeting in South Korea tried to avert?

Although Opec and IEA modified upward their supply and demand balances, the overall picture remains unchanged and the demand for Opec oil in 2010 is estimated at 28.6 and 29.2 million barrels a day (mbd) respectively. In 2011 the two organisations forecast the call at 28.8 and 29.3 mbd respectively. Not much change for Opec as it is hit by slowing demand, rising non-Opec production and its own rising natural gas liquids.

Inventories

"August OECD industry stocks rose by 15.8 mb to 2 790 mb, or 61.1 days, reaching their highest level since August 1998," the IEA said.

Similarly, Chinese oil imports rose recently to record levels with an estimated surplus over demand of 1.5 mbd to fill the strategic storage. While stock building is an addition to demand, it does weigh heavily over significant rise in oil prices in the future.

The current exuberance in oil prices has brought back the sentiment of many banks and analysts who foresee more strength to come.

The IEA, however, said "markets could remain comfortably supplied until well into 2011," implying no significant rise in oil prices except if quantitative easing in the United States causes a significant rise in oil demand over current projections. A recent poll by Reuters revised upward oil price expectations to average $83.32/b in 2011 driven by the expected direction of the new monetary stimulus package in the United States, though some analysts believe the revision is fragile.

The view held by positive pollsters is supported by growing demand in China, India and the Middle East and the rising seasonal demand as winter sets in. They do not expect stocks to decline significantly and said that politics may still have some surprises for us in addition to the continued activity in the speculative market.

There are some descending views as well and Carsten Fritsch of Commerzbank said: "We still expect oil prices coming under pressure later this year and early next year as fundamentals just don't warrant prices of $80 a barrel and beyond."

Others like Fritsch are looking at slowing demand in 2011, rising supplies and spare production capacity, the level of stocks and the much talked about increased Iraqi production which is yet to materialize.

Throughout 2010, most commentators discounted the market and they were proved wrong and now I believe 2011 prospects could well be treated in a similar fashion until everybody is assured of the economic recovery.

 

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