Oil in disequilibrium

The turbulence in oil markets in the past couple of months was, perhaps, a shock for many speculators. It was only a few months ago that oil traded at $147 a barrel. Today, it trades around $70 a barrel (if not less), a fall of more than 50%

Back in July, around the time the oil price peaked to unprecedented levels, commentators raised many alarms: The world is running out of oil; world demand for oil is high and only going to get higher still in the years and decades ahead; and most of the world’s cheap oil has already been discovered.

In spite of the fact that it was already clear the global economy was slowing, and therefore oil consumption would consequently slow, no one was really giving heed to this fact. Speculators and oil analysts were predicting higher and higher oil prices. To their dismay, it fell to as low as $70 in October as the global financial crisis struck world economies.

The sharp decline in oil prices led OPEC countries to think about cutting supplies in order to keep the black gold at a reasonable price. This move led prices to relatively rise above $71 a barrel on speculation that OPEC could cut production.

OPEC said in mid-October that it would hold an extraordinary meeting earlier than expected in the last week of October – instead of November – to discuss the global financial crisis and its effect on the oil market. “The threat of an OPEC cut at its meeting has lifted oil,” argued London-based Analyst David Evans. “Oil has been in a tailspin as worries of a full-fledged recession intensify. We believe that oil prices have hit their lowest and could only go higher from here,” he said.

According to Algerian Energy Minister and current OPEC Chief Chakib Khelil, OPEC, which pumps about 40 per cent of global crude supplies, was expected to order a substantial cut in oil output. “There will be a reduction in production at the next extraordinary meeting of OPEC, and it will have to be a substantial one to get the balance right between supply and demand,” he said. “If it has to be 1.5 million barrels per day, or 2 million barrels per day, that’s what it will be,” he added.

Khelil added that OPEC wanted oil prices to remain stable throughout the first half of 2009. The fall in demand, he argued, was being driven by lower consumption in big markets like the US, with global demand having fallen by 3 million bpd. “We want a stable price per barrel – neither too high, nor too low, between $70 and $90,” he said.

Skyrocketing oil prices in the past few months has led member countries of OPEC to significantly increase their daily output in an attempt to keep prices at a reasonable limit. OPEC then blamed the rise on speculators.


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