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 Infopetro -> Industry in Focus


World Crude Prices Become More Volatile

  03/24/2005

World crude oil prices, fueled by a variety of factors, had surged about 15 US dollars a barrel since the start of the year.

In March, crude prices had hit record highs repeatedly, in spite of previous forecasts that the prices will go down with the world's oil demand being comparatively weak this month.

Market analysts feared world oil prices might become more volatile in 2005 and it would be even harder to predict the trend of the world oil market.

Among a number of factors which contributed to the price surge,analysts said the most important one was tight supply, as the world's demand was increasing faster than the supply.

In December, many international organizations, including the International Monetary Fund and the Organization for Economic Cooperation and Development, lowered their outlook for the global economic growth in 2005.

Accordingly, international energy institutions, such as the International Energy Agency (IEA), adjusted downward their forecasts for the global oil consumption.

However, in stark contrast to those forecasts, the world's oil demand grew stronger. The United States, for example, added more than 800,000 barrels a day to its total consumption in March.

With the demand rising sharply, crude supplies, on the other hand, were still restricted by a number of factors, in particular,by the limited spare capacity of the Organization of Petroleum Exporting Countries (OPEC).

OPEC, which pumped out about 40 percent of world's crude oil, was going closer to its capacity limit. After adding 500,000 barrels a day to the market, it was now producing 27.5 million barrels a day, leaving a spare capacity of less than 2 million barrels a day.

"There is a lack of spare production and this brings nervousness to the market," said Venezuela's Oil Minister Rafael Ramirez. "We cannot do much more."

Most analysts expected oil prices to rise further until the tight supply could be eased in some ways. However, they differed over how high oil futures could rise.

Some analysts believed OPEC was unable to cap oil prices given its limited spare capacity. They were even more concerned about OPEC's ability to meet demand peak during the summer season, when gasoline consumption grows sharply.

Psychologically, there was no technical resistance for higher oil prices, especially after they surpassed the historical record mark, analysts said.

"There's a runaway world demand and until that growth slows you will see prices accelerate," said Tom Bentz, an oil broker in New York. "The short-term fundamentals don't determine the direction right now."

The market might now head for 60 dollars a barrel, according to Bentz. Some analysts even expected oil futures to touch 70 dollarsa barrel in 2005 if an unforeseen supply disruption occurred.

However, not all analysts were so pessimistic and betting on higher oil prices.

Commodity strategist Michael Guido, for instance, said the fear of a supply problem, not an actual supply problem, was driving the market psychology.

"If the economy took a turn for the worse, signaling a drop in energy demand, then prices might fall," he said.

"With warmer weather, high gasoline inventories and more OPEC production on the way, the prices of crude is poised to fall," said Jason Schenker, an analyst at Wachovia Corp.

Analysts pointed out that the oil markets would be dominated by two key factors for a quite long time.

The first one was market psychology. Traders now often shrugged off positive changes in short-term fundamentals, such as increasesin OPEC's production and the US crude inventories.

But they became more sensitive to negative changes in short-term fundamentals, such as colder weather and supply disruption and long-term fundamentals such as tight supply, analysts said.

The second factor was speculative buying. Large speculators always play a key role in pushing oil prices higher.

Commodity Futures Trading Commission reported early March that large speculators, such as hedge-funds and other institutional investors, had their biggest bet on higher oil prices since May.

Bentz warned that the increase in buying by large speculators was making the market more volatile. When large speculators built up their futures contracts, oil prices would go even higher, he said.

However, oil prices would fall sharply when large speculators suddenly withdrew or took profits, analysts said, warning that traders should be fully aware of the volatility caused by such speculation.

(Chinadaily Mar. 2005)



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